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Ask the expert: Why does inflation seem higher than the reported numbers?

November 16, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I keep hearing that savings and money market rates aren't so low compared to inflation, but it seems to me prices are rising. Gas is up, food is up -- and what could be more important than those to items? Why does it seem like inflation is a bigger problem than is being reported?

A: Inflation is pretty moderate, but savings and money market rates are so low that even moderate inflation is a force to be reckoned with. As of mid-November, the average rate on savings accounts nationally was 0.17 percent. The average rate on money market accounts was 0.24 percent. Meanwhile, the most recent year-over-year inflation reading was at 1.1 percent. So, most savings and money market accounts are losing ground to inflation.

This increases the importance of shopping for rates on savings accounts, money market accounts, and CDs -- in most cases, this is necessary in order to stay ahead of inflation.

As for the perception that inflation is worse than is being reported, that might be because everybody purchases a different combination of goods and services. The Bureau of Labor Statistics, which measures the Consumer Price Index (CPI), puts together a representative sample, but this can't be representative for everyone.

For example, housing prices were seen to have declined in the most recent CPI release. Real estate prices are generally down across the country, but if you live in an area where the real estate market has remained strong, or if you are a renter with a long-term lease, you may not have seen any decline in your housing costs.

Another example is in apparel, the only area beside housing where prices were down. Typically younger people will buy more clothes than older people, so a drop in apparel prices does not benefit everyone equally.

In short, inflation may be moderate overall, but it depends greatly on what you buy.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our "Ask the Expert" feature. Just go to the MoneyRates homepage and look for the "Ask the Expert" box on the lower left.

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