Oil prices threaten savings account rates
November 27, 2011
In the statement from the November meeting of the Federal Open Market Committee, the Federal Reserve expressed confidence that inflation would "settle." But in the short time since that meeting, inflation has shown no signs of doing so.
The source of trouble, as is often the case, is the price of oil, which has taken a sharp turn upward recently. With increases like this, inflation could continue to overwhelm interest rates on savings accounts, money market accounts, and CDs.
Resurgent oil prices
The price of a barrel of oil slipped quite a bit after peaking at $113.93 at the end of April. By early October, it had fallen as low as $75.67, a decline of 33.6 percent. Since then, though, oil has reversed course fairly dramatically.
The price of a barrel of oil rose by 17.7 percent in the month of October, and the trend has continued in November. Oil prices once again are threatening the $100-a-barrel mark. With this, rising oil prices and their ripple effect across inflation could further erode the value of savings accounts.
The threat to deposits
You've probably noticed the phenomenon at your local gas station: When oil prices rise, the price of gas is quick to follow, but when oil prices fall, gas prices are a little slower to respond. As unfair as it seems, this is just a cautious business practice. The gas companies don't want to get caught in a squeeze where the cost of crude oil rises faster than the retail price at the pump.
If you extend that principle across all businesses that are affected by oil prices--which, considering transportation costs, includes most things--you can understand why oil is such a powerful inflation threat. To use the Federal Reserve's term, inflation didn't exactly "settle" while oil prices were falling in recent months, but you can expect inflation to gain new momentum from the recent resurgence in oil prices. With current interest rates on savings accounts, CDs, and money market accounts languishing near zero, expect purchasing-power losses to continue for depositors.