Inflation continues to burn money market rates
November 01, 2011
The latest inflation number is the lowest in three months, but don't break out the party hats just yet. Inflation is still at a pace that badly burns the value of money market accounts. The primary fuel for this fire?
Appropriately enough, gasoline.
With average money market rates continuing to lose ground to inflation, it's worth a closer look at what's driving the inflation numbers.
Money market rates vs. inflation
In mid-October, the Bureau of Labor Statistics released statistics on the Consumer Price Index (CPI) for the previous month, showing that the CPI was up 0.3 percent in September 2011. This is slightly milder than the increases of 0.5 percent and 0.4 percent in July and August, respectively, but 0.3 percent still represents a fairly robust pace of price increases.
Projected over the course of a full year, monthly increases of 0.3 percent would result in an annual inflation rate of nearly 3.7 percent. As it happens, this is close to the actual inflation rate over the past 12 months, which was 3.9 percent.
The Federal Reserve has said repeatedly that inflation is not a concern, but consumers paying ever-increasing prices with stagnant wages have to be concerned about inflation. Certainly, inflation should be a worry for anyone with deposits in money market accounts.
According to the FDIC, the average interest rate on money market accounts is down to just 0.17 per year. With 3.9 percent annual inflation, $100,000 invested in a money market account at 0.17 percent would lose nearly $3,600 in purchasing power over the course of a year.
That may be mild compared to the steep losses the stock market has been experiencing, but it is pretty harsh for a supposedly safe investment. You can do quite a bit better than 0.17 percent if you shop around, but even the highest current interest rates will only slow the bleeding, not stop it.
All of which leads back to the question of why inflation is running at such a high rate. The evidence points clearly to one culprit.
Gasoline on fire
Gasoline prices have been the leading component of inflation in each of the past three months. What's odd is that this comes at a time when oil and gas prices are generally down.
The gasoline component of inflation was up 4.7 percent in July, 1.9 percent in August, and 2.9 percent in September. Now, rising gas prices may not seem all that unusual, but according to the U.S. Department of Energy, while gasoline prices did rise by 4.35 percent in July, they actually fell by 3.09 percent in August, and then fell again by 2.52 percent in September. The mystery deepens when you consider that crude oil prices were up by only 0.29 percent in July, and then fell by 7.2 percent in August and fell again by 10.82 percent in September.
Seasonal adjustments explain some of the discrepancies between actual gasoline prices and how they are reflected in the CPI, but they don't account for the disconnect between gasoline and oil prices. Perhaps its time for Congress to stop trying to micro-manage the banking industry, and look into why gasoline prices continue to fuel an inflationary fire that is burning American consumers.