Can a rising dollar turn back the tide of inflation?
October 04, 2011
The tide is rising rapidly--and that tide is inflation. But can a rallying U.S. dollar turn back that tide?
The answer is vitally important to people in savings accounts and other deposit vehicles, which have seen their interest rates swamped by the inflationary tide over the past year.
The rise of inflation
Through August 2009, year-over-year inflation was -1.5 percent. That meant that even though interest rates had already dropped precipitously, depositors were still gaining purchasing power. But by August of 2010 that had changed, as year-over-year inflation had risen to 1.1 percent. By August of 2011, year-over-year inflation had risen to 3.8 percent, easily overwhelming CD, savings, and money market rates.
The rise of the dollar
Because the United States imports so many goods from overseas, a rising dollar is anti-inflationary. It essentially makes imports more affordable. So, a dramatic rise in the dollar against the euro in recent weeks could be a positive development. The dollar rallied sharply against the euro throughout September, largely because of concerns about Greece. This reversed a steady fall of the dollar relative to the euro previously in 2011. It is not entirely a coincidence that this decline coincided with the steep rise in U.S. inflation.
Unfortunately, the rise of the dollar against the euro can only have a limited impact on inflation. Europe, after all, is not our only trading partner. The dollar has been declining against the Japanese yen, and the Chinese peg their currency to the dollar's value, so changes there are infrequent.
The bottom line for savings accounts
People in deposit accounts won't be getting ahead until their interest rates once again exceed inflation. According to the FDIC, as of late September the average interest rate on savings accounts was 0.12 percent. Money market rates averaged 0.17 percent, and CD rates ranged between 0.10 percent and 1.32 percent. All were far short of the 3.8 percent inflation rate.
A strengthening dollar probably won't get interest rates back ahead of inflation, but it could signficantly limit the damage. In this environment, that might be the best depositors can expect.
