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Inflation throws a curve at savings accounts

August 25, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Maybe it was perfectly in keeping with this "expect the unexpected" financial environment. Even so, last week's inflation report was a cruel blow to savings accounts and other deposits, which have already taken more than their fair share of lumps.

The latest twist from inflation

Last week's release of the Consumer Price Index from the Bureau of Labor Statistics indicated that inflation rose by 0.5 percent in July. This is a fairly high rate of inflation--it brought year-over-year inflation to 3.6 percent, and if continued a 0.5 percent monthly rate would translate to annual inflation of over 6 percent.

This high inflation number was a bit like an actor going off script. Inflation in recent months had been weakening, which was consistent with the slowing economy. The rate of inflation slowed in April, May, and June, with June's number slipping into negative territory. However, July's 0.5 percent inflation marked a return to the highest readings of the year.

The source of this surge of inflation is a little curious. Oil prices perked up a little in July, but this shouldn't be an ongoing problem as they have resumed their downward course in August. Apparel costs rose by 1.2 percent in July, which was their third consecutive monthly increase of more than 1 percent. That seems odd given weak consumer spending, and will remain a key area to watch.

Impact on savings accounts

Interest rates on savings accounts, like CD and money market rates, are so close to zero that they provide virtually no cushion against inflation. With the economy appearing to weaken, no rise in these rates was on the horizon, but the silver lining was that inflation seemed to be weakening along with the economy. This latest flare-up of inflation increases the burden on savers, robbing them of purchasing power because interest rates aren't close to keeping up with this level of price increases.

Savers will have to watch the next inflation report anxiously. Monthly numbers can be erratic, and indeed, the last two inflation reports have sent conflicting signals. The next one might be an indication of which way the trend is developing.

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