Personal Finance Blog By MoneyRates - November 2009

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.

Investopedia has a nice piece up right now about how to save a million dollars. Tips include:

-- Stop spending on useless stuff.

-- If you deserve a raise, make sure you get it.

-- Don't overpay your income taxes.

Money-Rates provides readers with the ability to quickly find the best CD rates, best savings account rates, best money market account rates, and best mortgage rates...and those savings add up, too.

More important than any particular trick of the trade, though, if your mission is to have and/or keep a large amount of money in your savings account, is the attitude you take towards saving money.

Refusal to pay unnecessary bank fees, for instance, is a sure sign of a millionaire saver's mindset. Demanding that you get the best CD rates, rather than the second best, is another millionaire-istic life choice.

The list goes on, there are so many manifestations of wealth-minded thinking.

No doubt the most valuable thing for the determined saver to realize, then, is that good saving is the fruit of good thinking, of really committing at a deep level to wealth-minded thought processes.

People who make that first, fundamental choice frequently make other, also correct choices as they progress down the path.

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.

Not sure if you've been following the latest bank hearings--there have been so many of them over the past year, who could begrudge you for missing out--but these bank hearings may be bigger than most.

The Senate is dicussing what to do about the "too big to fail" big banks and too big other companies that act like banks, such as insurance companies.

Apparently, if Bloomberg's exclusive report is to be believed, the Senate may actually pass a law that results in the breaking up of several big banks.

John Reed, the former CEO who started Citigroup towards being too big to fail, has even apologized to Congress for using that strategy.

Could big banks such as Citigroup really be broken up?

Populist conspiracy theorists would suggest no, that the Wall Street types would never give up access to the savings accounts and CDs and money market accounts of millions of people.

But what if conservative investments such as savings accounts and CDs were, somehow, segregated by law from speculative investments such as, say, betting on the value of copper on November 13, 2009.

For that is, essentially, what modern giant banks do: use deposit accounts to fund other aspects of the operation.

Previously, circa September of 2008, this system worked fantastically, and it is even working not bad right now, if impressive bank earnings are to be believed.

Could this system, this idea that banks should not only hold money but actively invest it, actually be on the verge of being dismantled?

If so, is that a good thing?

Or will it simply mean that the real business of banking moves the rest of the way off-shore?

The mix of factors now prevailing in the financial markets is almost the perfect recipe to challenge anyone depending on CD rates, savings account rates, or money market rates. In other words, it may be the perfect poison for bank rates. Fortunately, markets eventually tend to find antidotes to their own ills.

First the poison, then the antidote.

The poison consists of three ingredients:

• A U.S. dollar which has been steadily sinking. The weakness of the dollar can be seen immediately in the rising price of oil, but eventually it will show up in the prices of all imports, creating inflation pressure here in the U.S. Bank rates are really only as good as the premium they offer over inflation. When rising inflation squeezes that premium, depositors suffer.
• Signs of life in the U.S. economy. At least, the stock market seems to think the economy is on the right track. If the rising stock market is right, a strengthening economy would spell the end of the deflationary period, and another reason for the return of inflation.
• Government policies committed to keeping interest rates low. The government (like many experts) views the recovery as fragile, so they are going to do everything they can to keep interest rates at low, stimulative levels for as long as they can.

So much for the poison. The antidote? That also comes in three parts:

• A strengthening economy would increase demand for capital, which would make banks offer higher rates to attract depositors.
• Rising inflation would force the Federal Reserve to raise rates before inflation gets out of hand.
• Without waiting for those market forces to come around, you can mitigate the effects of the poison by shopping actively for the best bank rates. The spread between the best and average bank rates is huge.