Aussies spending on credit could up-end RBA’s inflation battle

The RBA is banking on interest rate rises to squash inflation but a worrying Aussie reaction could ruin their entire plan.

In years gone by, the Australian people had quite a love affair with their credit cards, with purchases made on credit cards equalling a record high 20 per cent of GDP in 2008.

Since then, Australians have slowly moved away from credit cards, reducing their outstanding balances and increasingly taking advantage of various reward programs, rather than leaving their balance accruing interest.

The rise of ‘Buy Now, Pay Later’ services has also slammed the outstanding balance of credit cards into reverse in recent years, as Australians increasingly opt 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 accruing interest costs has fallen 42.7 per cent, from $31.7 billion to just $18.2 billion today.

But around the world where the cost of living is biting hard, households in other nations have turned to credit cards in droves in order to keep up with inflation.

UK and the US leading the way on credit card usage

With US inflation recently hitting 9.1 per cent, its highest level in more than 40 years, Americans are increasingly looking for ways to keep up with the rising cost of living. Like Australians, Americans are seeing their inflation adjusted purchasing power evaporate before their eyes and many are struggling to make ends meet.

The UK and the US have reacted to rising costs by spending on credit.

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

As Americans seek to keep up with rising costs, they have increasingly turned 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 largest expansions of revolving consumer credit in American history. With Americans adding more than $37 billion (US$25 billion) to their collective credit card and line of credit balances during March alone.

While this needs to be put into the context of an economy with an annual GDP of $36.9 trillion (US$24.8 trillion), the recent expansions in 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 expanded their revolving consumer debts by an average of more than $20 billion (US$14 billion) per month. In the decade prior to 2022, the average monthly expansion was a significantly lower $2.5 billion (US$1.68 billion) per month.

This is arguably a contributing factor in the relative strength of US retail sales in face of rising consumer prices. While the most recent data release showed roughly flat retail sales on a month on month basis, without Americans turning to the plastic, one would imagine things would look significantly more challenging.

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

With Britain staring down the worst energy crisis in living memory and predictions of up to 22 per cent inflation being made by some analysts, more Britons may turn to credit cards and other forms of consumer credit to pay the bills in the coming challenging months.

Australians to turn to the plastic?

Unlike in the United States where credit cards have continued to remain a prominent driver of the US economy, in Australia credit card balances as a percentage of GDP peaked in 2008 and have more than halved in the last 14 years.

While part of this decline has been driven by the rise of ‘Buy Now, Pay Later’ services and the increase in cash out home equity withdrawals, Australians have also learned to play the credit card game better.

Part of this is turning to the credit card less often in relative terms, but it’s also taking advantage of various reward programs and interest free periods.

The proportion of outstanding credit card balances accruing interest has fallen from 75.1 per cent in 2011, to just 47.0 per cent in the latest data release from the Reserve Bank.

Overall the trend in the aggregate balance of Australian’s credit cards has been down for quite some time. But with the release of the most recent data from the RBA, there are signs Australians are turning back toward using their credit cards.

In June, the outstanding balance of Australians credit cards rose by more than $660 million dollars, the second largest expansion for the month of June on record.

When looking at the big picture, Australians have plenty of scope to turn to their credit cards in order to keep up with the rising cost of living in the same way as Americans and Britons.

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

While Australians turning to credit may be considered a perfectly logical response to the rising cost of living far outstripping wages growth, it could also create a sizeable problem for the RBA.

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

Depending on how the inflation outlook continues to evolve in the coming months, Australians spending more on their credit cards may drive the Reserve Bank to take interest rates higher than they otherwise would have.

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

Originally published as Aussies spending on credit could up-end RBA’s inflation battle