Money market accounts benefit from inflation break
December 01, 2011
Money market accounts have been taking a constant pounding from inflation lately, so the recent news that prices actually declined in October came as a welcome break. Unfortunately, indications suggest that this may only be a temporary reprieve.
On November 16, the Bureau of Labor Statistics released Consumer Price Index (CPI) data for the month of October. Overall, CPI declined by 0.1 percent during October. With money market rates near zero, any decline in prices gives them some much-needed breathing room. Unfortunately, a look inside the CPI numbers reveals why this decline may be a one-time blip rather than the beginning of a new trend.
The devil in the details
October's seasonally-adjusted 0.1 percent decline was just the second monthly decline in CPI in the past year. On the surface, you might think that this is part of a trend toward easing inflation. After all, after reaching 0.5 percent in July, the monthly inflation rate subsequently slipped to 0.4 percent in August and 0.3 percent in September before the October decline in prices. Unfortunately, the cause of this decline is not likely to be repeated in November.
Overall, energy prices declined by a full 2 percent in October, highlighted by a 3.1 percent drop in gasoline prices. Other components of inflation, including food, clothing, shelter, and medical care prices, were generally higher for the month. So, the decline in energy prices was largely responsible for October's drop in the CPI. Of course, a leading role for energy prices in inflation is not unusual. Not only is energy itself a significant component of the CPI, but energy costs affect the price of virtually every other good and service that goes into the CPI.
This being the case, the direction of oil prices in November is disturbing. After starting the month at $93.19, the price of a barrel of oil surged past $100 on November 16th--an increase of more than 7 percent in half a month.
As you've probably noticed, gasoline prices are much quicker to follow the price of oil upward than they are to adjust downward when oil prices decline. At the very least, it appears that October's decline in energy prices won't be repeated in November, and energy will likely resume putting upward pressure on inflation.
Embattled money market rates
With money market rates nationally averaging 0.16 percent, there is little room for inflation before depositors start losing purchasing power. The current 3.5 percent year-over-year inflation rate represents a significant loss of purchasing power. So if price declines really did become a trend, current money market rates wouldn't be so bad. However, if inflation settles in at 3.5 percent, or starts rising again, then money market accounts will continue to steadily lose purchasing power.
What makes this loss of purchasing power all the worse is that the Federal Reserve continues to insist that inflation is not a concern. As a result, they are doing everything in their power to keep interest rates low, which is one of the reasons why money market rates are approaching zero. Unless the Fed changes its mind, the best you can do is shop around for the best money market rates you can find--and watch oil prices with your fingers crossed.