Bank Rate Watchers Should Keep An Eye On This Week's Inflation Number

The Consumer Price Index for October will be released this Wednesday, and it could mark the beginning of the end for the spate of deflation the U.S. has experienced for much of the past year. For bank rate watchers, wondering when savings account interest rates and CD rates will start to rise, inflation remains a key indicator.

Deflation is the one thing that has made the unusually low level of bank rates bearable. After all, a 1.5% interest rate with a -1.5% inflation rate represents a 3% return over inflation. That's actually a better deal than depositors usually get under normal inflation conditions.

However, the next three inflation releases -- figures for October, November, and December -- are likely to show that conditions are changing. Last year, prices dropped sharply in those three months. The change in the Consumer Price Index was -0.8% in October of 2008, -1.7% in November of 2008, and -0.8% in December of 2008. It is unlikely that declines of that magnitude will be repeated in the last three months of this year. So, as the calendar rolls forward and those declines start to drop out of the year-over-year numbers, expect to see the twelve-month inflation numbers start to turn positive again.

This would represent something of a squeeze for depositors. Those already-low bank rates will be further eroded by inflation. In theory, inflation should eventually cause bank rates to rise, but with banking finances still somewhat fragile, it remains to be seen just how quickly banks will react to the changing inflation scenario. Chances are, the timing and degree of adjustment will vary greatly from bank to bank, so this will be a very important time to shop actively for bank rates.

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