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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

A Drop In Consumer Prices -- With A Catch





Inflation took a step back in March, which is news that should come as a relief to bank depositors in savings accounts and other interest-bearing instruments. However, there is a catch involved that prevents this from being completely good news for depositors.

Prices decline in March

Last week the Bureau of Labor Statistics announced that the Consumer Price Index (CPI) declined by 0.2 percent in March. This put to rest fears of a flare-up of inflation that had been stoked by the previous inflation report, which showed a 0.7 percent rise in the CPI during February. The decline in consumer prices during March left inflation at a moderate 1.5 percent over the past year, and running at an even milder pace over the past six months.

Once again, petroleum products were the key driver of inflation. In February, a 9.1 percent spike in gasoline prices had contributed heavily to the rise in the CPI. In March, a 4.4 percent drop in gasoline prices was the leading factor the CPI's decline.

Declining prices are a welcome break for bank depositors. With CD, savings, and money market rates generally running below 1 percent, virtually any inflation represents a loss of purchasing power for bank accounts. The catch is that the March decline in CPI was accompanied by signs of a slowing economy, and that is not good news for depositors.

Four scenarios and their impact on savings accounts

To better understand the trade off between falling prices and slowing growth, imagine a four-way grid that depicts the possible outcomes for both inflation and economic growth, with each ranging from high to low. The result would be four possible combinations, as described below:

  1. Low inflation, slow growth. If this sounds familiar, it's because it has been the dominant environment of the past few years. In this scenario, inflation doesn't do too much damage, but savings accounts are not able to get ahead because slow growth keeps interest rates low.
  2. High inflation, slow growth. This would be even worse for depositors, because while rising inflation might eventually push interest rates higher, a slow growth environment would likely mean that interest rates would rise more slowly than inflation, causing savings accounts to lose purchasing power more quickly.
  3. High inflation, high growth. Under this scenario, both interest rates and prices could rise rapidly. Savings, money market and certificate of deposit rates would look healthier, but that would largely be an illusion because much of those higher rates would be eaten up by inflation.
  4. Low inflation, high growth. This was the best-of-both-worlds environment that the U.S. enjoyed during the late 1990s. It would give interest rates a chance to get solidly ahead of inflation again.

The March CPI number suggests the U.S. is still in the first scenario. Depositors can count their blessings that it isn't the second one, but the ideal of the fourth one still seems a long way away.

null

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
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!
SYM TRADE IT LAST %CHG

Markets

DOW 18,082.55 -120.82 -0.66%
S&P 500 2,096.26 -11.52 -0.55%
NASDAQ 4,964.4840 -15.4170 -0.31%

Partners Compare Online Brokers

Free Reports

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