Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Credit Card Rewards Points
Transcript
- Lucas: So the July CPI came in at 332.8, up another notch from June. And I keep coming back to something that doesn't show up in the index at all. Luna: What's that? Lucas: The purchasing power of credit card rewards. Your points, your miles, your cash back. Inflation erodes those just as ruthlessly as it eats your salary, but nobody runs the CPI on a loyalty program. Luna: You mean the points you earned in January aren't worth as much by August? That's the kind of quiet erosion that catches people off guard. Lucas: Exactly. And it happens on two levels. First, the dollar value of a point is often fixed — say one cent per point — so a $50 statement credit costs you 5,000 points, same as last year. But the flight or the hotel room you'd redeem those points for has gone up with inflation. So the same points buy you less real travel. Luna: Right, the cash value is sticky, but the underlying purchase inflates. That's a nasty combo. Lucas: Then there's the second level: issuers quietly devalue the chart. Airlines shift award pricing, hotels move to dynamic pricing, and suddenly a standard award that used to cost 25,000 miles costs 40,000. The mile's purchasing power drops even if the dollar value stays the same. Luna: And with the ten-year breakeven inflation rate at 2.27 percent, the market is expecting this to keep going. So the points you earn today are likely to buy even less in a couple of years. Lucas: Right. Now, let's make this concrete. Take a typical domestic round-trip flight that a few years ago might have run 25,000 miles. Today, on many programs, that same route is 35,000 or 40,000 miles. That's a 40 to 60 percent devaluation in two or three years — far outpacing the CPI. Luna: So my miles are shrinking even faster than my paycheck in real terms. That's sobering. Lucas: And it's not just airlines. Hotel programs have moved to dynamic pricing, so a night that used to be 15,000 points can now be 25,000 on a busy weekend. The same physical asset, but your points buy less of it. Luna: What about cash back? That seems more straightforward, but does it actually keep up? Lucas: Cash back is the most honest of the bunch, because a dollar is a dollar. But even there, inflation nibbles. If you earn 2 percent cash back and inflation is running at 3 percent, your rewards are negative in real terms. You're effectively paying 1 percent to use the card. Luna: Ouch. So the only way to win is to earn more than inflation, which most flat-rate cards don't. That pushes people toward category bonuses and rotating calendars. Lucas: Exactly. And that's why this topic fits so well with this show. We've talked about how inflation eats your emergency fund, your bond ladder, your HSA. Today we're adding the rewards points sitting in your wallet. Lucas: Before we go deeper into strategy, I want to take a quick honest second. You know, this podcast is listener-funded. No ads, no sponsors. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: And we're grateful for every one of them. It's what keeps these episodes ad-free and focused on the numbers that matter for your money. Lucas: So if our conversations have helped you think about a decision differently, that's the door. No pressure, just know that it's how we keep the lights on. Luna: Alright, back to the points. So what's the smart play here? Should people be redeeming points faster? Lucas: That's the core tension. Because points are subject to inflation, the old advice to hoard them for a big trip may actually be backwards. Unless you have a specific redemption in mind, sitting on a huge pile of miles is like sitting on cash that's losing value. Luna: So you're saying the 'save up for a dream vacation' strategy is a bad idea? Lucas: In a rising inflation environment, yes. The longer you hold, the more likely the program devalues. And we've seen that repeatedly. Just look at how many programs have shifted to dynamic pricing in the last few years. Luna: But doesn't that argue for using points for statement credits or gift cards that have fixed values? Lucas: Sometimes. But the math is tricky. Statement credits typically give you a lower cents per point value. If you can get 1.5 cents per point on a flight but only 1 cent on a statement credit, you're leaving money on the table, especially if you would have flown anyway. Luna: So it's a balance between beating inflation and getting the best redemption value. That's a real puzzle. Lucas: Right. And the wildcard is annual fees. If you're paying a $550 fee on a premium travel card, you need to be redeeming enough to offset that. In an inflationary world, the fee stays the same, but the value of the perks might not. Some issuers have already started trimming lounge access or raising thresholds. Luna: That's a good point. With the Fed holding rates at 3.63 percent, the opportunity cost of paying a big annual fee is higher than it was a few years ago. Lucas: Exactly. So here's a concrete rule of thumb: don't let points sit for more than twelve to eighteen months without a plan. If you don't have a redemption in mind, consider cashing out via statement credit or using them for purchases that won't lose value, like gift cards to places you actually shop. Luna: But gift cards are also exposed to inflation if you don't use them quickly. Lucas: That's why the advice is to use them quickly. The point isn't to hoard in any form — it's to convert your rewards into something that holds value, ideally an experience you'd buy anyway. Luna: So what's the bottom line for someone listening who has, say, 100,000 points sitting in a travel portal? Lucas: First, check the current redemption rates. Are they still offering the same value per point as when you earned them? Second, look at the trend. Has the program devalued in the past year? If so, that's a signal to redeem sooner rather than later. Luna: And if the program is dynamic, you might be better off using points for fixed-value redemptions like merchandise or gift cards. Lucas: Sometimes. But the math is tricky. Statement credits typically give you a lower cents per point value. If you can get 1.5 cents per point on a flight but only 1 cent on a statement credit, you're leaving money on the table, especially if you would have flown anyway. Luna: So it's a balance between beating inflation and getting the best redemption value. That's a real puzzle. Lucas: Right. And the wildcard is annual fees. If you're paying a $550 fee on a premium travel card, you need to be redeeming enough to offset that. In an inflationary world, the fee stays the same, but the value of the perks might not. Some issuers have already started trimming lounge access or raising thresholds. Luna: That's a good point. With the Fed holding rates at 3.63 percent, the opportunity cost of paying a big annual fee is higher than it was a few years ago. Lucas: Exactly. So here's a concrete rule of thumb: don't let points sit for more than twelve to eighteen months without a plan. If you don't have a redemption in mind, consider cashing out via statement credit or using them for purchases that won't lose value, like gift cards to places you actually shop. Luna: But gift cards are also exposed to inflation if you don't use them quickly. Lucas: That's why the advice is to use them quickly. The point isn't to hoard in any form — it's to convert your rewards into something that holds value, ideally an experience you'd buy anyway. Luna: So what's the bottom line for someone listening who has, say, 100,000 points sitting in a travel portal? Lucas: First, check the current redemption rates. Are they still offering the same value per point as when you earned them? Second, look at the trend. Has the program devalued in the past year? If so, that's a signal to redeem sooner rather than later. Luna: And if the program is dynamic, you might be better off using points for fixed-value redemptions like merchandise or gift cards. Lucas: Exactly. And the good news is that rewards can actually help you fight inflation if you use them right. For example, using points for a flight or hotel that would otherwise cost you cash frees up money to invest in something that keeps up with — or beats — inflation. Luna: Like putting that freed-up cash into an I bond or a TIPS fund, or maybe even a broad equity index. Lucas: Precisely. That's the smart way to think about rewards in an inflationary era: not as a savings account, but as a discount voucher that loses value if you sit on it too long. Luna: So use them or lose them, but use them smartly. That's a great takeaway for a summer Friday. Lucas: And maybe the next time you're about to redeem a massive points balance, ask yourself what that same balance would get you six months from now. Because the answer is probably less.