Bank Rates Need Rethinking with New Inflation Numbers

As expected, October’s inflation number represents something of a turning point for the inflation environment. Depositors now need to watch closely to see how savings account rates, money market rates, and CD rates respond.

The Consumer Price Index (CPI) for October of 2009 increased by 0.3%. That’s a fairly normal monthly increase for inflation, but it is in sharp contrast to October of last year, when the CPI declined by 0.8%.

The change in CPI for the twelve months ending October of 2009 is still negative, at -0.2%. Still, this is milder than the year-over-year deflation rates we’ve seen for much of this year. Significantly, CPI declined nearly 2.5% in just the last two months of 2008. Assuming this won’t be repeated in 2009 – and considering the improving state of the economy now, and the crumbling state of it last year, this is a more than fair assumption — we can expect to see inflation re-established by the end of this year.

This is significant for bank rates because up until this point, low bank rates could be justified by the deflationary environment. Factoring in deflation, even bank rates in the 1% to 2% range represented a better deal to depositors than it appeared. Now that deflation is quickly reverting to inflation, this will no longer be the case.

This increases the importance of shopping actively and frequently for competitive bank rates. This is no longer a question of simply desiring a little extra yield. It will now become a fight to stay ahead of inflation.