Over the past few years, bank rates have offered depositors a
pretty bad deal. Having fallen to near zero,
rates on savings accounts and other deposits
have consistently trailed inflation. Now, however, might be the
time to give bank rates a fresh look.
No, savings account rates haven't suddenly risen, nor have CD or
money market rates. But with inflation suddenly taking a step back,
bank rates now represent a better deal than they did just a few
Getting ahead of inflation
By now you know the story: In response to the Great Recession,
bank rates fell to near zero, and they have yet to recover. While
they still represent a safe haven in an otherwise very uncertain
financial environment, the problem is that bank rates haven't
beaten inflation since 2008. That means that while deposit accounts
still protect you against losses of principal, the purchasing power
of that principal has been steadily eroded by inflation.
This has changed in recent months. Again, bank rates haven't
suddenly been resurrected, but inflation has slipped back
noticeably. After flaring up in the first quarter of this year,
inflation has been negative since, meaning that overall prices have
actually declined. This has given savings account rates and other
deposit rates a rare opportunity to get ahead of inflation.
A historical perspective on bank rates
In truth, the opportunity for bank rates to beat inflation is
only rare in the context of the past few years. From a longer-term
historical perspective, it should be perfectly normal.
According to bank rate data from the Federal Reserve and
Consumer Price Index data from the Bureau of Labor Statistics, over
the past 40 years short-term bank rates have averaged an annual
return of 5.99 percent, while inflation has risen at an annual rate
of 4.38 percent. This history gives us some idea of what "normal"
should look like: Bank rates typically should be running at an
annual rate of 1.61 percent ahead of the inflation rate.
Over the four months ending in July, the Consumer Price Index
declined by 0.3 percent. If it continued at that rate over the
course of a full year, that would result in an annual decline of
about 0.9 percent. If prices did decline by that rate, a typical
bank rate of 0.10 to 0.20 percent would earn 1 percent to 1.1
percent over inflation. That's not up to the historical standard,
but it's not bad from the perspective of recent years.
Even better, consumers who shop for the best interest rates on
their savings can find rates of around 0.8 percent. If inflation
continues on its recent track, that would put these customers about
1.7 percent ahead of inflation. In other words, they could earn
something very similar to the historical return over inflation. For
the first time in years, things could be back to normal for those
With rising oil prices and pressure on food prices, there's no
telling how long "normal" will last. Still, whether inflation
continues to recede or comes charging back,
shopping for the best bank rates
will remain a wise approach.