Is inflation making a comeback?
February 21, 2012
The latest inflation report carried mixed messages: a moderate rate of inflation for now, but ominous signs of pressure from oil prices.
The Bureau of Labor Statistics reported that inflation for the month of January was 0.2 percent. There are good and bad sides to this: 0.2 percent is a fairly moderate pace of monthly inflation, but it was the highest inflation rate in four months. The question is, after virtually no rise in the Consumer Price Index (CPI) in the fourth quarter of 2011, is inflation poised to return?
Rising inflation would be a problem for the economy in general, but in particular it would threaten people who are dependent on interest income from savings and money market accounts. Inflation can hurt them immediately in one way, and over the longer term in another.
Inflation trends
The mild inflation of recent months has brought year-over-year inflation back below 3 percent for the first time since early last year. However, with Federal Reserve policy focused on stimulating growth, inflation is a threat to bubble up at any time.
What could push inflation higher is the rising price of petroleum products. The price of a barrel of oil recently rose back above the $100 mark. Overall, fuel oil rose 12.1 percent over the past year, and gasoline jumped 9.7 percent.
Oil prices also made a run at about this time last year and may have been responsible for slowing down the economy in the months that followed. Will history repeat itself?
The 'now and later' effect on savings account rates
While inflation costs all consumers, it is especially hard on those who depend on money market and savings accounts for income. The immediate effect is a loss of purchasing power. Inflation for January may be considered moderate at 0.2 percent, but that single month's worth of inflation is enough to wipe out a year's worth of interest at today's average savings and money market rates. Similarly, even with inflation slipping below 3 percent for the past year, that is still enough to cause a loss of 2 percent or more in purchasing power for savings and money market accounts.
That's the "now" effect. The "later" effect comes from the role inflation could play in keeping savings and money market rates down in the future. Under normal circumstances, interest rates would adjust to the level of inflation, but given the persistently soft economic conditions of the past few years, interest rates have remained low in spite of inflation. If rising prices slow the economy just as it seemed to be improving, it would probably mean an even longer wait before interest rates could rise.
Employment has been the key economic indicator to watch in recent months, and that has been steadily making progress. However, the wild card to keep an eye on now is oil. More price pressure from that sector could be a drag on employment, and on economic growth in general.
