What Interest Rate Shoppers Should Watch About Inflation

Inflation has been on the lips many market observers lately, despite the unusual bout of deflation we've seen recently. For you rate fanatics, or for that matter anyone concerned about protecting their savings from the ravages of inflation, this discussion has important implications. A return of inflation would make it a bad time to be locked up in long-term certificates of deposit at today's low interest rates. Staying in shorter term CDs or money market and savings accounts would be a better way to ride interest rates upward as they adjust to changes in inflation.

So is there merit to the inflation debate? Consider two schools of thought:

• The cyclical view. Conventional thinking still persists in thinking that inflation goes with growth, despite evidence to the contrary in the 1970s (inflation without much growth) and 1990s (growth without much inflation). As the economy shows signs of a rebound, will this automatically bring back inflation? It appears that there is some slack to be taken up in the labor market and in capacity utilization before that happens.
• The non-cyclical view. This view is driven by events outside of the ordinary cycle, such as oil bouncing back after an extreme drop, and the dollar suffering from huge government spending. This view is harder to argue against, and indeed, Washington's spending seems to be catching up with the dollar already.

The conclusion? If not time to stay short, at least consider laddering your CDs.

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