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!

How higher inflation might benefit savings accounts -- eventually





The Bureau of Labor Statistics (BLS) announced Tuesday that inflation perked up a little bit in March -- and the stock market promptly rallied after the announcement.

To anyone who lived through the inflation-plagued 1970s, the idea of investors welcoming inflation may seem like a through-the-looking-glass type of experience. Welcome to the 21st century.

The upside of rising prices

The BLS reported that the Consumer Price Index rose to 0.2 percent in March. That would project to an annual inflation rate of 2.4 percent -- higher than the 1.5 percent rate of inflation over the past year, and only the second time in the last eight months that inflation exceeded 0.1 percent.

Significantly, the BLS report showed solid price gains across most sectors, rather than inflation being narrowly driven by a spike in one or two sectors. That seems to suggest these price increases are not due to temporary disruptions, but that they are taking hold throughout the economy in general.

Here's the tricky part: Inflation is not normally welcomed like a long-lost friend. So why the positive market reaction to an uptick in inflation?

The answer is that while moderate inflation is good, if it slips toward deflation (i.e., falling prices), it is a symptom of severe economic weakness. In fact, deflation can become part of a vicious cycle: Low demand leads to falling prices, and once consumers observe that prices are falling, they feel no urgency to buy now, so demand falls further.

From Wall Street to the Federal Reserve, there has been some concern that inflation, which has been at 1.5 percent over the past 24 months, has been a little too quiet. After all, if the economy were actually picking up steam, one would expect inflation to be rising a bit.

Thus, signs of life from inflation can be interpreted as signs of life for the economy as a whole.

Careful what you wish for

However, the experience of the 1970s can be seen as a cautionary tale. That was the decade when the expression "stagflation" came into the vocabulary -- a combination of economic stagnation and high inflation. The 1970s proved that rising inflation does not necessary signal strengthening economic demand.

1 of 2

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 18,203.37 -85.26 -0.47%
S&P 500 2,107.80 -9.59 -0.45%
NASDAQ 4,979.9010 -28.1950 -0.56%

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