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TheStreet Open House

Deposit Rates Vs. Inflation: A Battle Of Attrition





There hasn't been much inflation in recent years, but there's still been enough to eat away at the purchasing power of savings accounts. That trend continued with the latest release of the Consumer Price Index (CPI), which showed that prices increased at a seasonally adjusted rate of 0.2 percent in September, bringing the inflation rate for the past year to 1.2 percent.

Lowering the inflation hurdle

Inflation is the hurdle that savers and investors have to get over before they can start really making money -- or more accurately, start gaining purchasing power. Normally, you can expect that inflation hurdle to be around 3 or 4 percent, but over the past year that hurdle has been much lower.

In one of the economic releases that was delayed by the government shutdown, the Bureau of Labor Statistics put out the September CPI report on October 30. Though the gain of 0.2 percent was mild, it was a tick up from August's 0.1 percent.

Energy was the chief culprit in pushing prices higher, as this segment of the CPI increased by 0.8 percent during September. In contrast though, energy prices have actually declined by 3.1 percent for the one-year period, which has been an important influence in keeping inflation moderate. Furthermore, there is reason to believe that energy will continue to have a dampening effect on inflation when October's figures are released, as oil prices declined through most of the month.

A symptom of a weak economy

Even though the inflation hurdle has been particularly low over the past year, savings accounts have still failed to clear it. While the inflation rate stands at 1.2 percent, savings accounts are yielding an average of just 0.06 percent. Money market rates are not much better, and even five-year CDs are failing to beat inflation, with an average yield of just 0.75 percent.

The underlying problem is that those nice low inflation rates are a symptom of a weak economy. Demand is so weak that companies lack pricing power, which results in low inflation. That same lack of pricing power discourages companies from expanding and hiring, which in turn further weakens the economy.

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