Inflation rides roughshod over savings accounts

At first it seemed like a temporary anomaly. Then it was something more than a blip, and now it seems as though it might be settling into a sustained trend.

Inflation appears to be off and running.

On July 22, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) increased by a seasonally adjusted 0.3 percent in June. That may not sound like much, but it means that prices rose by more in one month than most savings accounts earn in a year.

Prices running away from savers

Measured on a monthly basis, inflation figures such as June's 0.3 percent increase often sound somewhat innocuous. However, June marked the third month in a row during which the CPI rose at an annual rate of well over 3 percent. In contrast, the inflation rate for the past year was just 2.1 percent.

Low inflation has been one of the few silver linings in the economic environment of recent years, though prices have generally been increasing much faster than the value of savings accounts and other deposits. If inflation exceeds 3 percent annually, savers will fall even further behind. Even if higher inflation eventually sparks a rise in interest rates, savings accounts have a long way to go just to catch up.

Inflation, of course, is just one measure of how the cost of living is increasing, and rising inflation could in turn make the cost of buying a house more expensive. Current mortgage rates are still just barely over 4 percent, but that is unlikely to last if inflation starts surging toward 4 percent.

Inflation of things, not wages

To make matters worse, recent price increases seem to be driven by commodity inflation, specifically in the energy sector. In other words, this is inflation in the price of things, not of wages, which makes it even harder for consumers to make ends meet.

According to the BLS report, gasoline prices rose by 3.3 percent in June alone, and by more than 6 percent in the second quarter of 2014. Meanwhile, there is still considerable slack in the labor market, despite recent job growth. This means that employees are seeing very modest wage increases. Most would have to string together a few years' worth of raises just to match the 6 percent that gasoline prices rose by in the second quarter.

As always, energy sector inflation is especially troubling because of the likelihood that it will spread to the many other sectors that depend on energy for production and distribution. With troubles involving the Middle East and Russia deepening, more upward pressure on energy prices may be in store.

There is some hope. Continued employment growth could bring stronger wage increases, and in time could even boost interest rates. However, it looks as though inflation has gotten the jump on wages and interest rates, meaning that the best paychecks and savings accounts can hope for is to play catch-up.

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