Inflation Signals Relax, But Not Enough for Depositors

By Richard BarringtonLifestyle and

Recent weeks have been a worst-of-both-worlds scenario for savings accounts and other deposits, as stalled economic momentum weakened the prospect for rising interest rates, while a flare-up of inflation accelerated the loss of purchasing power in these accounts. But could conditions now be improving on at least one of those fronts?

Continue Reading Below

A break from inflationary pressures

Concerns about inflation were calmed somewhat by the August 14 release of the Producer Price Index (PPI). In this report, the Bureau of Labor Statistics announced that the PPI was unchanged for the month of July, and had increased by 2.1% over the past 12 months. These numbers represent an easing of producer inflation compared to June's figures, when the PPI was up 0.8% for the month, and 2.5% for the past year.

Consumers are directly affected by retail prices, as reflected in the Consumer Price Index (CPI). However, producer prices can give some insight into the future direction of consumer prices. Companies tend to shelter consumers from short-term price changes for competitive and demand reasons, which is why the PPI can be more erratic from month-to-month than the CPI. In the end though, any sustained trends in producer prices will be reflected to some degree in consumer prices, as companies have to protect their profit margins.

For this reason, July's lack of change in the PPI is a welcome reversal of a trend that had seen producer prices rise sharply in both May and June.

More On This...

Gasoline levels off

Significantly, easing energy costs were one reason that producer prices leveled off in July. Recent months have seen an increase in oil and gas prices that propelled a rise in overall consumer prices. Retail gas prices continued to rise in July, and this may well impact the CPI number for that month. Thinking longer-term though, it is encouraging to see producer energy costs easing, as these costs ultimately affect consumer prices in just about every sector.

Another good sign for the future is that retail gasoline prices actually slipped a little in the first two weeks of August. Gasoline prices rose sharply earlier this year and created some inflationary pressure, but now they are actually below where they were a year ago.

Implications for savings accounts

CD, savings and money market rates would benefit from two things: an improving economy and low inflation. An improving economy would improve the investment and lending outlook to the point where banks would feel a stronger incentive to attract deposits by offering higher interest rates. Until this happens, it is especially important for inflation to stay in check.

As it is, savings accounts and other deposits have already been losing purchasing power to inflation over the past few years. It may be too soon to expect deposit rates to get back ahead of inflation, but it is reasonable for depositors to hope that inflation doesn't rise even higher above the current levels of savings account, money market account and CD rates.

The original article can be found at signals relax but not enough for depositors