If there's a major curve ball that's been thrown at the economy
this year, it was the inflation report for August. Not that the
economy has been on much of a hitting streak, but this inflation
news is like a nasty curve that caught a struggling batter
completely by surprise.
The Bureau of Labor Statistics announced September 14 that the
Consumer Price Index rose
by 0.6 percent in the month of August. What's so surprising about
that? Well, it's the highest one-month jump in inflation in more
than three years, and one of the highest monthly increases of the
past decade. Also, it comes after a four-month period when
inflation seemed completely subdued.
A bad time for price increases
To add some more context, the inflation report came out one day
Federal Reserve announced
its new program of quantitative easing. At that point, everyone
assumed that the only challenge the Fed had to deal with was a
chronically slow economy. That has proven a tough enough problem to
solve, but dealing with inflation at the same time would completely
change the game.
After all, rising inflation tends to push up interest rates, and
low interest rates have been the Fed's number one tool for trying
to revive the economy. What's worse for consumers is that the
impact of inflation may not be the same across all interest rates.
It is entirely possible that consumers may end up paying higher
interest rates on loans, without receiving much more interest on
their deposits. Here's how the impact of a
slow-growth/rising-inflation environment could play out across
three types of interest rates:
Savings accounts and other deposits.
While persistent inflation would probably push
, savings, and money market rates higher in the long run, those
increases would probably trail behind the rate of inflation,
meaning depositors would still lose purchasing power. The heart
of the problem is that deposits have grown much faster than loan
volume, so many banks have more money on their hands than they
can use, and thus no reason to offer higher rates to attract more
Mortgage rates would either rise due to higher inflation, or
loans would become harder to get because with current mortgage
rates already roughly around the historical rate of inflation,
lenders would not want to make loans at those rates with
inflation rising. The market would remain tight until either
inflation subsided again, or mortgage rates became high enough to
compensate lenders for the risk of inflation.
Not only could inflation push credit card rates higher, but
rising concerns about credit risk could cause additional rate
hikes for many consumers. In other words, a combination of
inflation and a weak economy could create two ways for credit
card customers to lose.
It's too early to tell whether inflation is going to be a
growing problem, or whether August's number was just a one-month
fluke. But if inflation becomes a continuing part of the game, it
may be tough for consumers to avoid striking out.