Inflation: Australia’s credit card spending could upset RBA’s economic plan

In years past, Australians had a real love affair with their credit cards, with purchases made with credit cards equating to a record 20% of GDP in 2008.

Since then, Australians have slowly moved away from credit cards, reducing their outstanding balances and increasingly taking advantage of various rewards programs, rather than letting their balances accrue interest.

The rise of ‘buy now, pay later’ services has also turned the backlog on credit cards in recent years, as Australians increasingly choose to pay for their goods in instalments rather than putting them on the plastic.

For example, since January 2019, the outstanding balance of all Australian credit cards bearing interest charges has fallen by 42.7%, from $31.7 billion to just $18.2 billion today. .

But all over the world, where the cost of living is very hard, households in other countries have turned en masse to credit cards to cope with inflation.

UK and US lead the way in credit card use

As inflation in the United States recently hit 9.1%, its highest level in more than 40 years, Americans are increasingly looking for ways to cope with the rising cost of living. Like Australians, Americans are watching their inflation-adjusted purchasing power evaporate before their eyes and many are struggling to make ends meet.

According to data from the US National Energy Assistance Directors Association, more than 20 million US households, or nearly one in six, are behind on their utility bills.

As Americans seek to meet rising costs, they are increasingly turning to revolving forms of credit such as credit cards to maintain their standard of living.

According to data from the US Federal Reserve, recent months have seen some of the biggest expansions in revolving consumer credit in US history. Americans added more than $37 billion (US$25 billion) to their collective credit card and line of credit balances in March alone.

While this should be seen in the context of an economy with an annual GDP of $36.9 trillion (US$24.8 trillion), recent expansions of this type of credit have arguably been a significant driver of recent economic activity at the margins.

Since the start of the year, Americans have increased their revolving debt by more than $20 billion ($14 billion) per month on average. In the decade to 2022, the average monthly expansion was well below $2.5 billion (US$1.68 billion) per month.

This is no doubt a contributing factor to the relative strength of US retail sales in the face of rising consumer prices. With the latest data release showing retail sales roughly flat month-over-month without Americans turning to plastic, one would imagine things would be much tougher.

It’s not just Americans who are turning to plastic in an attempt to keep up with the cost of living. In the UK, the annual growth rate of credit card borrowing recently reached 13%, its highest level since October 2005.

As Britain faces the worst energy crisis in living memory and some analysts forecast up to 22% inflation, more Britons could turn to credit cards and other forms of credit at home. consumption to pay their bills in the difficult months ahead.

Will Australians switch to plastic?

Unlike in the US where credit cards have remained a major driver of the US economy, in Australia credit card balances as a percentage of GDP peaked in 2008 and have more than halved over the past 14 years.

Although part of this decline is due to the rise of “Buy now, pay later” services and the increase in cash withdrawals from the equity in the property, Australians have also learned to better play the credit card game.

This is partly due to turning less often to the credit card in relative terms, but also to taking advantage of various rewards programs and interest-free periods.

The proportion of outstanding credit card balances earning interest fell from 75.1% in 2011 to just 47.0% in the latest Reserve Bank data release.

Overall, the overall Australian credit card balance trend has been down for some time. But with the release of the most recent data from the RBA, there are signs Australians are turning to using their credit cards.

In June, Australians’ outstanding credit card balances rose by more than $660 million, the second largest increase on record for the month of June.

When looking at the bigger picture, Australians are free to turn to their credit cards to meet the rising cost of living in much the same way as Americans and Brits.

Australians could collectively put another $40 billion on their credit cards before approaching the previous record high for credit card outstanding as a percentage of GDP.

While Australians turning to credit may be seen as a perfectly logical response to the rising cost of living far outpacing wage growth, it could also create a big problem for the RBA.

As it stands, the RBA is trying to reduce overall levels of demand by raising interest rates, but while Australians are counteracting this somewhat by spending billions more a year on their credit cards, efforts of the RBA to reduce inflation may be less effective than desired.

Depending on how the outlook for inflation continues to evolve in the coming months, Australians spending more on their credit cards could prompt the Reserve Bank to raise interest rates than they otherwise would.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

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