Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Eats Your Credit Card Rewards
Transcript
- Lucas: Let’s talk about the invisible tax on your wallet that most people never notice until it’s too late. It isn’t your grocery bill, and it isn’t your rent. It is the slow, quiet erosion of your credit card reward points. Luna: Wait, you think my cash back is losing value? That seems counterintuitive when everything else is getting more expensive. Lucas: It feels like a win because the number in your account stays flat, but the purchasing power behind those points is shrinking for two reasons. First, inflation drives up the price of the goods you would buy with those points, so each point buys less. Second, and more importantly, the cost of carrying a balance has skyrocketed while the value of the rewards has stayed stagnant. Luna: So if I carry a balance, the interest I pay is effectively stealing from the bank’s marketing budget, which they then use to keep the reward program running. Lucas: Exactly. And today, with the Fed Funds effective rate holding at three point six three percent, that dynamic has flipped entirely against the consumer who carries a balance. Let’s look at the numbers. When the Fed Funds rate was near zero, banks were making money on interchange fees alone and could afford to give you two percent cash back. Now, their cost of capital has tripled. Luna: Right, so they are no longer subsidizing your rewards out of pure generosity. They are trying to recoup their own borrowing costs through the people who slip up on payments. Lucas: Precisely. The average credit card interest rate is now pushing past twenty-four percent. So if you carry a five thousand dollar balance for a year, you are paying roughly twelve hundred dollars in interest. Meanwhile, that same spending generates maybe one hundred dollars in rewards. You are net negative by eleven hundred dollars, and the bank uses that surplus to fund the loyalty programs for the other ninety-nine percent of users who pay in full. Luna: That is a brutal arbitrage. But what about the people who do pay in full every month? Are their rewards safe? Lucas: They are safer, but they are not immune. We need to look at core CPI, which came in at three thirty-six point eight earlier this month. When prices rise, the fixed pool of points issued by banks becomes less valuable unless the bank issues more points to match inflation. They almost never do that. Instead, they rely on what the industry calls breakage. Luna: Breakage. You mean the points people forget to use or let expire? Lucas: Yes, but there is a second type of breakage that is more insidious. It is the gap between the face value of a point and its actual redemption value. Airlines and hotels have been aggressively devaluing their currencies for years. An airline mile that used to get you a domestic flight for fifteen thousand miles now costs twenty-five thousand. That is a sixteen percent devaluation in just a few years. Luna: And since inflation is eating into the general price level, those higher mile costs are buying even fewer actual seats or nights than before. Lucas: Spot on. So you have double whammy. Your points are worth less in terms of travel inventory, and the things you want to buy with cash-back rewards are costing more. Let’s look at the broader market context. The S&P five hundred is up nearly four percent over the last five days, hitting seven thousand seven hundred and nineteen. Investors are pricing in a soft landing, but for everyday consumers, the friction is real. Luna: I wonder if this devaluation is happening faster in the luxury space or if it’s across the board. Lucas: It is everywhere, but it hits flexible points hardest. Programs like Amex Membership Rewards or Chase Ultimate Rewards used to offer a sweet spot where you could transfer points to airlines at a one-to-one ratio and get high value. Banks have raised the transfer bonuses threshold and reduced the base value. They want you to redeem directly for statement credits at one cent per point, which sounds good until you realize that one cent doesn’t stretch as far as it did three years ago. Luna: So the strategy shifts from hoarding points to using them immediately before they lose more ground. Lucas: That is the new rule. Hoarding cash-like assets in a loyalty program during an inflationary period is a bad move. Unlike gold or treasury bonds, loyalty points have no yield. They sit there doing nothing while the currency around them depreciates. Look at the ten-year breakeven inflation rate sitting at two point three five percent. That is the market telling us inflation expectations are sticky. If your points don’t grow, they are losing real value every single day. Luna: This makes me think about the recent news with sugar outperforming the stock market. Commodities are rising, which usually signals underlying inflation pressure. If the cost of living goes up, the fixed nature of reward points becomes a liability. Lucas: Exactly. Sugar is a great example because it is a basic input for so many consumer goods. When inputs rise, margins get squeezed, and companies look for ways to offset costs. For banks, reducing the effective payout rate on rewards is a way to protect their net interest margin without explicitly raising fees. It is a subtle shift that happens in the fine print. Luna: Do you think we will see banks start charging for premium rewards cards more aggressively? Lucas: They already are, but indirectly. Annual fee hikes are common, but the real hit is coming in the form of lower earning categories. Cards that used to give five percent on groceries might drop to three percent, or rotate categories more frequently. This forces you to manage multiple cards just to keep up with the changing landscape, which increases the risk of missing a payment or falling victim to the interest trap I mentioned earlier. Luna: So the complexity itself is part of the cost. If I am juggling three different apps and rotating categories, I am more likely to make a mistake. Lucas: Absolutely. Complexity is a feature, not a bug, for these programs. It creates cognitive load that leads to suboptimal behavior. Most people end up using the easiest redemption method, which is usually the worst value. They book a hotel directly through the portal for one cent per point instead of transferring to an airline partner for three cents per point. Luna: It’s basically a game designed so that only the super-engaged players win, and everyone else pays the tax. Lucas: That is a perfect summary. And in an environment where time is money, the time spent optimizing those points might not be worth it for the average person. Especially when you consider that the real return on investment is protecting your principal from inflation first. Luna: Before we wrap this up, I want to mention something important about how we keep these conversations going. Lucas: If our financial analysis has helped you see your money differently, the way these shows stay ad-free is through listener support. You can buy me a coffee dot com slash fexingo. Luna: It is a small contribution that directly helps us dig deeper into topics like this, keeping the research sharp and independent. Lucas: Thanks for keeping the signal clean. Now, back to the data. We mentioned the PCE price index earlier, which came in at one hundred thirty-one point seven. This is the Federal Reserve’s preferred gauge. Luna: Right, and since the Fed targets two percent inflation, seeing that index tick up means they are unlikely to cut rates anytime soon. That keeps the cost of capital high. Lucas: Correct. High rates mean high credit card APRs. And high APRs mean that any rewards you accumulate are being eaten away by the opportunity cost of not having that cash available. If you have ten thousand dollars in unredeemed points, ask yourself: could that ten thousand dollars be working harder elsewhere? Luna: Like in a high-yield savings account or a short-term treasury bill? Lucas: Yes. A Treasury bill currently yields close to the Fed Funds rate, giving you a guaranteed return with zero effort. Points require you to shop, track, and gamble on devaluation. In this macro environment, certainty is a premium asset. Luna: It really changes how you view those little icons in your banking app. They aren’t free money; they are deferred compensation with a depreciating exchange rate. Lucas: Exactly. So the next time you are staring at a screen full of points, remember that patience is not always a virtue when the denominator is shifting under your feet. The question isn’t how much you have earned, but how much you can still spend before the value drops below the cost of acquisition. Luna: A sharp reminder to treat loyalty like a currency that needs to be converted, not a vault that needs to be filled.