Prime Rate in the U.S. was recently cut to a four year low of 4.0%. The last time prime hovered at these levels was between July 2003 and July 2004. However, on a comparative basis, average offered credit card interest rates are more than 21% higher than they were back then. How then is this justified?
Likely the banks established floor rates with new credit cards issued during the interim period when prime rates were significantly higher.
As a result, during the past 12 months prime rate dropped from 7.75% to 4.50% or 325 basis points, while average offered credit card interest rates have dropped only 160 basis points.
This got me thinking… where else have I noticed a similar trend. Where consumer prices rose exponentially relative to commodity prices, however once the commodity prices began to fall, the decrease in consumer prices were less than commensurate. The answer, of course is gas.
Looking at average gasoline pump prices against the per barrel cost of crude oil since the commodity started declining, you will notice that consumer gasoline pricing has remained relatively flat versus a commodity price that has plunged over 30% recently.