Thinking Ahead: Inside the Inflation Numbers

April’s inflation number (CPI), released last week showed a year-over-year decline in consumber prices of 0.7%. Prior to March, year-over-year inflation hadn’t been negative since 1955. Now we’ve seen it happen for consecutive months, and the bigger decrease in prices through the end of April might seem to suggest that the pace of deflation is accelerating.

The numbers, however, deserve a closer look.

If deflation really takes hold, it can make seemingly low CD rates much more palatable. At the same time, CD buyers don’t want to become complacent. If you look at the detail of the inflation numbers, there are a couple of red flags that suggest deflation may not be here to stay:

• The real declines in prices were in late 2008, not this year. They are only showing up in the year-over-year numbers now because some rather high inflation months are starting to drop out of the 12-month trailing period.
• The year-over-year decline in prices through April was helped tremendously by a 25% decline in energy prices. Is this likely to be repeated over the next year? No. In fact, oil prices have been trending higher lately.

A revival of inflation would not just send CD rates (and interest rates generally) higher, but it would probably create a divergence in rates as different banks react at different speeds. Staying up-to-date and informed about certificates of deposit may be more important than ever in the months ahead.