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Economic Review

8/10/2009

US Consumers may begin to feel the pinch of higher costs due to the economic fallout

A majority of economists/analysts are of the opinion that inflation is likely to rise significantly down the road given the massive liquidity injected in the system through the numerous bailouts, Fed purchases of Treasuries, the falling US$, etc.  This opinion is no doubt a sound one but the timing of the effects will be hard to fine tune.  Another increase in costs for consumers will most likely be a hike in taxes to help address the massive deficits that have been created, but that may be a ways off as well. 

One issue that may affect consumers’ cost of living in the near term involves a micro economic issue that is currently being considered by credit card companies.  No it’s not higher rates, but something called interest accrual from point of purchases.  In other words, users of credit cards would have to pay interest on balances, with the interest accruing from when purchases were made.  So if you’re one of those fiscally minded individuals that pay their balances off completely at the end of each month, you would still have to pay interest on balances generated during the billing period.  This of course is mostly likely in response to the massive losses incurred by credit card companies from numerous card holder insolvencies.

So why haven’t credit card companies adopted such a tactic years ago since it would raise their revenues?  The answer is that this policy may not raise revenues.  What may just transpire is that individuals cut back on credit card usage and conduct transactions with good old cash or checks.  Is this point of payment interest accrual likely to happen?  Let’s just say it’s a 50/50 shot.  What may seem to be a revenue generator for credit card issuers may just backfire into losses.

And you thought I was going to do some analysis on last week’s employment report...boring.

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