No Boost In Interest Rates, but Productivity and Inflation Reports are Good News for Depositors

You probably haven't seen any kind of a bump up in your savings account interest rate lately, and you won't see banks suddenly offering higher CD rates. Even so, last week's economic news did hold a couple positive signs for depositors.

The good news came in the form of official economic releases on inflation and productivity. Inflation, which had perked up quite strongly in June, was flat for the month of July. That brought the 12-month change in the Consumer Price Index to -2.1%. With prices declining at that rate, it's like adding a couple percent to whatever interest rate you're earning. That means that if you've shopped around for one of the higher savings account rates, you would have seen your purchasing power increase by about 4% over the past year -- with around 2% from interest rates, and another 2% from the decline in prices.

The productivity report gives some fundamental support to the low inflation trend. Productivity gains help the economy grow without bringing on inflation. Strong productivity improvements were one reason why the U.S. economy enjoyed both sustained growth and low inflation during the 1990s. The productivity gain in the second quarter of this year was the strongest in six years.

It is fairly typical for productivity to tick up when an economy first starts to accelerate -- basically, it represents excess capacity being put to productive use once again. So, with the recession starting to ease, this productivity gain was to be expected. Still, it means things are progressing as they should be -- and that even without higher interest rates, depositors may be doing a little better than they thought.

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