Ben Bernanke recently pronounced that inflation is not a significant threat right now while announcing that the Fed would continue its policies to keep interest rates low. The bond market, which has the most to lose from a flare-up in inflation, was not impressed. Should you be?

As a starting point, remember that your interests are different from those of bond holders. While inflation is dangerous for bond holders, it is more neutral for deposit account holders, who could see CD rates and interest on money market and savings accounts rise if inflation flares up. However, the benefit of these increases would be counterbalanced by the loss in purchasing power to inflation. So, should you be rooting for Bernanke to be right, or against him?

Your Savings: If Bernanke Is Right...

If Bernanke is right that inflation isn't a threat, then depositors have a pretty decent situation right now. Yields on money market and savings accounts, as well as short-term CD rates, may only be around 1.5%, but smart shoppers can easily get over 2% by finding the best interest rates. With year-over-year deflation recently reaching the 1% mark, this 2% is actually worth 3% in purchasing power terms.

So, if Bernanke is right and this trend continues, depositors are getting a pretty decent real rate of interest. However, the year-over-year deflation numbers may be a bit deceiving. The deflation effect was concentrated in the last months of 2008; so far in 2009 the trend has been toward mild inflation, though this may not show up in the year-over-year numbers until later in the year.

Your Savings: If Bernanke Is Wrong...

If Bernanke is wrong, and inflation makes a comeback, the picture is murkier. Rising inflation would eat into those real interest rates, but short term deposit institutions would adjust by raising interest rates pretty quickly. In other words, it's better for depositors if Bernanke is right, but staying short-term is still the best course of action in case he's wrong.

Sources:

0000-00-00 • http://www.bls.gov • http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUSR0000SA0&output_view=pct_1mth

Jeannine Aversa • Fed says recession is easing, inflation is tame • Jun 24, 2009 • http://www.yahoo.com • http://finance.yahoo.com/news/Fed-says-recession-easing-apf-232707420.html?x=0&sec=topStories&pos=main&asset=&ccode=