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Weakening inflation: a mixed omen for savings accounts

September 23, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Since inflation is the enemy of savers, a slowing of the Consumer Price Index (CPI) should be good news for savings accounts. The only catch is that the subtext in today's economy sends a discouraging signal for CD, savings and money market rates.

Price rises moderate as gasoline eases

On September 17, the Bureau of Labor Statistics reported that the CPI increased by just 0.1 percent during August. That is a significant easing of the trend from the two prior months, which had seen the CPI increase by a total of 0.7 percent. This leaves the CPI up just 1.5 percent over the past 12 months -- a very moderate rate of inflation.

The calming of inflation owes a great deal to gasoline prices. These had been the most inflationary component of the CPI in June and July, but this portion of the index declined by 0.1 percent in August. Gasoline prices were also a key factor in keeping year-over-year inflation moderate, as this component of the CPI declined by 2.4 percent over the past 12 months.

That's the biggest decline of any component of CPI over the past year, though it is a bit of a fluke. The year-over-year comparison benefits from the fact that gasoline prices surged in August and September of last year, before easing over the remainder of the year. After September then, the year-over-year figures are likely to show gasoline in a more inflationary light unless prices decline considerably. For example, while gasoline prices were down for the past 12 months through the end of August, they were up by 7.5 percent so far in 2013, according to figures from the Energy Information Administration.

One reason to think gasoline prices may ease further is the apparent peaceful solution to the international confrontation over the use of chemical weapons in Syria. While there are still more questions than answers about how unrest in Syria and Egypt will be resolved, removing the immediate threat of a widening war from the Syrian equation should take some of the speculative pressure of off oil prices.

Faint praise for the economy

An easing of inflation is good news for savings accounts because interest rates on those accounts have been unable to keep up with rising prices. The only catch is that the easing of CPI growth comes in the context of concern that the economy is once more slowing down. Lack of demand due to a slow economy may help keep prices in check, but it also dashes any hope that a revived economy would start pushing deposit rates higher.

Another example of this assumption of economic weakness came when the stock market rose on September 16 in reaction to news that Lawrence Summers had removed his name from consideration as Fed chairman. This was not optimism, but instead the market cheering the likelihood that the Fed's low interest rate policies would continue. That faint praise for the economy does not bode well for savings accounts.

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