Something happened in the second quarter of 2012 that hadn't
happened in two years: Savings accounts actually made money.
More specifically, this was the first time since the second
quarter of 2010 that inflation dropped below the rate of
interest on savings accounts
. A small victory, perhaps, but depositors who've seen their
savings accounts steadily eroded by inflation will take any respite
they can get.
This only happened because price increases took a break during
the last quarter. The question is, how long will this inflation
holiday last?
A low threshold for pain
According to the FDIC, savings account interest rates now
average just 0.09 percent. This gives savings accounts a very low
threshold for pain as far as inflation is concerned. Any inflation
in excess of 0.09 percent a year will cause savings accounts to
lose ground to inflation. To put that in perspective, inflation
generally exceeds 0.09 percent in a normal month, let alone a full
year.
In recent years, the effect of inflation on artificially low
interest rates has been devastating. MoneyRates.com calculated
earlier this year that U.S. bank depositors have lost more than
$500 billion in purchasing power
over the past three years because interest rates have been below
inflation during most of that period.
The second quarter of 2012 was different not because deposit
rates suddenly recovered, but because inflation took a step back.
According to the Bureau of Labor Statistics, the
Consumer Price Index
actually declined by 0.21 percent during the quarter, on a
seasonally-adjusted basis. This was the first quarterly decline in
consumer prices since the second quarter of 2010, which is why that
was the last time that savings accounts came out ahead of
inflation.
Soothing oil, summer heat
This inflation relief comes from an unlikely source. Energy
prices declined in each of the past three months, largely because
of a sustained decline in oil prices. The energy component of the
Consumer Price Index is now down by 3.9 percent over the past
year.
In theory, the retreat in oil prices could not have come at a
better time. Earlier in the year, the concern was that rising oil
prices would act as a drag on the U.S. economy. Conversely, falling
oil prices could have a stimulative effect, but it doesn't look
like it's going to work out that way.
For one thing, oil prices are falling in part because of
concerns over slowing economic growth globally, especially in
Europe. That could be an even more pervasive drag on U.S. growth
than inflation.
For another thing, inflation may have taken a holiday in the
second quarter, but don't expect it to be done for the year. A
brutally hot and dry summer throughout much of the U.S. has caused
widespread drought conditions. Ruined crops are likely to lead to
higher grain prices, and in turn higher meat and dairy prices.
In short, scorching weather conditions are threatening to heat
up price increases again, which could make the inflation holiday a
short-lived phenomenon.