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
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 percent 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 percent for the
month, and 2.5 percent 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
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.
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
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
money market account
and CD rates.