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Savers get relief as oil prices drop

November 15, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Face it -- the fiscal cliff is the 800-pound gorilla in the room right now in terms of economic news. People are so afraid of it that it seems to have everyone's full attention.

But as important as these budget negotiations are, there are still other economic developments worthy of monitoring. Sometimes these even yield good news, as with the case of the recent trend in oil prices.

Oil prices and inflation

Oil prices are like a person with a bad reputation -- nobody talks about them much when they are behaving, but when they flare up they become one of the top economic concerns.

Oil prices have made headlines in a negative way twice this year. They surged above $100 a barrel in the early weeks of 2012, sparking fears of the type of sustained run in oil prices that helped slow the economy in 2008. Then, after subsiding from those high levels, oil prices jumped by about 20 percent in just eight weeks this summer.

That summer spurt in oil prices sparked a resurgence of inflation in August and September. Oil prices play an especially important role in inflation. Not only are oil and gasoline important components of the Consumer Price Index themselves, but because so many other aspects of the economy depend on oil and gas for their manufacture and transportation, any sustained rise in fuel costs can soon spill over into other goods and services.

For now though, the inflation threat from oil prices seems to have subsided. The past several weeks have seen oil prices ease from the high $90s to the mid $80s. For all the ups and downs oil prices have had this year, by early November they were about $10 a barrel below where they started 2012. That's the type of trend in oil prices that is very conducive to low inflation.

The effect on savings accounts

A low-inflation environment is vital to savings accounts, because they have so little breathing room. Average savings account rates are near zero, but rates can be found that are closer to 1 percent. If inflation stays flat, deposits in those accounts can make a little money. However, if inflation flares up even a little, the purchasing power of savings accounts starts to decline.

Add all this up, and you can see why people with savings accounts and other deposits might want to keep a wary eye on oil prices. A flat-to-negative price trend for oil is critical to those accounts staying ahead of inflation.

Waiting for the cliff

Of course, what depositors really want is for bank rates to rise. In large measure, that comes back to the fiscal cliff. A constructive solution to that problem may well be the best chance for generating the type of sustainable growth that could lead to higher rates in 2013.

Your responses to ‘Savers get relief as oil prices drop’

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Lydia

23 November 2012 at 1:44 pm

Ignore this advice for savers it's completely wrong. Sustained inflation in oil prices will eventually boost interest rates. For a saver with a decent amount of funds in cash, the extra interest payments more than offset higher prices at the pump. I don't think a saver with $50,000 earning less than 1% feels "relief" because gas prices trimmed a few bucks per pump trip.

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