Moderating Inflation Offers Some Relief for Bank Rates
January 20, 2010
| MoneyRates.com Senior Financial Analyst, CFA
Bank rates have been in a squeeze lately. It doesn't matter whether you look at savings account rates, money market rates, or CD rates, the level of bank rates generally has been low and showing little sign of movement in recent months. Meanwhile, inflation has been on the rise -- and that's where the squeeze comes from.
For a while, low-to-negative inflation rates were the one silver lining about bank rates. Looked at on the basis of return over inflation, even a 1% or 2% bank rate isn't bad if prices are going down. In recent months, though, with inflation rising and bank rates standing pat, that return over inflation has been eaten away.
Fortunately, today's announcement that the Producer Price Index rose only 0.2% in December, along with last Friday's announcement that the Consumer Price Index rose only 0.1% for the same period, may represent some easing of inflation pressures. The two previous readings of the Producer Price Index had been 0.3% and 1.8%. As for the Consumer Price Index, December's figure was the smallest increase since July of 2009.
Producer prices tend to be more erratic from month to month, while retailers try to keep consumer prices more steady for competitive reasons. However, if producer prices make a sustained upward move, consumer prices will be forced to follow to some degree, or else retailers will lose their profit margins.
What depositors really want is to see bank rates rise. While they are waiting though, it is equally important that inflation doesn't completely overwhelm those rates. Thus, the moderating of producer and consumer prices in December is a good sign. Still, inflation bears as close an eye as bank rates themselves.
Richard Barrington
21 January 2010 at 2:07 pm
Thanks for your insights. No doubt, there is often a disconnect between the official figures and what we see in our daily lives, because what are the odds that any of us would happen to purchase the exact combination of items that is used to calculate the official inflation figures?
With that being said, housing and gasoline are two things I can think of off the top of my head that are cheaper now than, say, in mid-2008. Still, the deflation I referred to occurred in late 2008/early 2009. Since then inflation figures have been rising, and while the most recent numbers were more moderate, they were still positive. Which, unfortunately, does mean higher prices.
Hoody
21 January 2010 at 8:43 am
Are you kiddin me? this is all a way to keep people thinking theres "no inflation" these CPI numbers can be and are manipulated to suit the number jugglers.
None of what I buy or pay for has gone "down" by any %, in fact most has gone up. including my last home assessment, yeah it went UP., so I now pay 200 more in real estate tax.
This is ALL a bunch of BS, its just a way for the Gov. to have an out with this "no COLA" thing.
If were so broke, than say so, and nobody gets any raises, active duty, active fed workers, or what ever, and No one should get any bonus' either, since theres "NO INFLATION" lets keep it ALL evean than.