Getting gasoline prices under controlGasoline prices have been volatile in recent years, and have tended to lead the way for inflation in general. In this case, the overall decline in prices was largely due to gasoline prices getting back under control after a late summer flare-up. The CPI is composed of prices on a range of goods and services intended to represent a typical consumer's buying experiences. One of these components is gasoline, and this part of CPI declined by 7.4 percent in November. However, that decline is just the flip-side of the sharp rise in gas prices that pushed inflation up by 0.6 percent a month in August and September. This is fairly typical of the course that inflation tends to chart. Month-to-month figures can be quite erratic, and an unusual increase one month is often cancelled out by a decline a month or two later. For example, over the past 12 months prices have neither soared nor declined, but instead have risen at by a moderate 1.8 percent.
A brief respite for savings accountsAccording to the FDIC, the average interest rate for savings accounts these days is just 0.07 percent. Compared to that rate of interest, even 1.8 percent of inflation is a problem. It means that the purchasing power of savings accounts has declined over the past year, which has been the trend generally since the Great Recession.
Therefore, depositors in savings accounts can welcome November's decline in prices as a brief respite from this loss of value, but they should not consider it a long-term solution for two reasons:
- Episodes of deflation tend to be short-lived. More often than not, a month or two of deflation is simply a correction of a previous over-increase in prices, as was the case recently with gasoline.
- Deflation, when it does take hold, can be indicative of a weak economy. For savings account rates to rise from their current levels, the economy will need to strengthen. An improving economy with moderate inflation would be the best outcome for savings accounts in the long run.