This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Inflation Throws A Curve At Interest Rates





If there's a major curve ball that's been thrown at the economy this year, it was the inflation report for August. Not that the economy has been on much of a hitting streak, but this inflation news is like a nasty curve that caught a struggling batter completely by surprise.

The Bureau of Labor Statistics announced September 14 that the Consumer Price Index rose by 0.6 percent in the month of August. What's so surprising about that? Well, it's the highest one-month jump in inflation in more than three years, and one of the highest monthly increases of the past decade. Also, it comes after a four-month period when inflation seemed completely subdued.

A bad time for price increases

To add some more context, the inflation report came out one day after the Federal Reserve announced its new program of quantitative easing. At that point, everyone assumed that the only challenge the Fed had to deal with was a chronically slow economy. That has proven a tough enough problem to solve, but dealing with inflation at the same time would completely change the game.

After all, rising inflation tends to push up interest rates, and low interest rates have been the Fed's number one tool for trying to revive the economy. What's worse for consumers is that the impact of inflation may not be the same across all interest rates. It is entirely possible that consumers may end up paying higher interest rates on loans, without receiving much more interest on their deposits. Here's how the impact of a slow-growth/rising-inflation environment could play out across three types of interest rates:

  1. Savings accounts and other deposits. While persistent inflation would probably push CD, savings, and money market rates higher in the long run, those increases would probably trail behind the rate of inflation, meaning depositors would still lose purchasing power. The heart of the problem is that deposits have grown much faster than loan volume, so many banks have more money on their hands than they can use, and thus no reason to offer higher rates to attract more deposits.
  2. Mortgages. Mortgage rates would either rise due to higher inflation, or loans would become harder to get because with current mortgage rates already roughly around the historical rate of inflation, lenders would not want to make loans at those rates with inflation rising. The market would remain tight until either inflation subsided again, or mortgage rates became high enough to compensate lenders for the risk of inflation.
  3. Credit cards. Not only could inflation push credit card rates higher, but rising concerns about credit risk could cause additional rate hikes for many consumers. In other words, a combination of inflation and a weak economy could create two ways for credit card customers to lose.

It's too early to tell whether inflation is going to be a growing problem, or whether August's number was just a one-month fluke. But if inflation becomes a continuing part of the game, it may be tough for consumers to avoid striking out.

null

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,461.32 -153.49 -0.92%
S&P 500 1,927.11 -14.17 -0.73%
NASDAQ 4,382.8470 -36.6310 -0.83%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs