Inflation Up Slightly, Impact on Savings Rates is Currently Minimal, For Now

The Labor Department reported today that the Consumer Price Index rose by .4% in February versus a .3% rise in January. From the release:

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in February after rising 0.3 percent in January. The energy index rose 3.3 percent in February following a 1.7 percent increase in January as the gasoline index rose 8.3 percent in February after a 6.0 percent increase in January. In contrast, the indexes for fuel oil and natural gas both declined in February. About two-thirds of the all items increase was due to the rise in the gasoline index. Compared to the July 2008 peak, the energy index was 29.2 percent lower and the gasoline index was down 44.0 percent. The food index turned down slightly in February, falling 0.1 percent. The food at home index fell 0.4 percent with five of the six major grocery store food group indexes posting declines in February. The index for all items less food and energy rose 0.2 percent in February, the same increase as in January. The indexes for new vehicles and apparel increased substantially in February, and the indexes for rent and owners' equivalent rent increased slightly. Partly offsetting these increases were continuing declines in the indexes for lodging away from home and airline fares.

The rise in gas prices over the last couple of months is the single largest contributor to the modest level of inflation. If you're traveling then it looks like hotels and air travel may be bargains, helping to offset gains in food, rent, vehicles, and clothing.

The numbers fall comfortably within the Fed's target zone. For savers, the inflation rate is small enough to have a minimal impact. Inflation at this modest a level doesn't significantly eat into savings rates (which are abysmally low to begin with). You can see that this wasn't the case at this time last year as rising oil and commodity prices fueled a significantly higher inflation rate and cut the real savings rate. At the same time, deflation from collapsing oil prices at the end of the year, significantly boosted the real return on savings and deposit accounts.

The February inflation figures, for now, would seem to ease concerns about a deflationary spiral. Inflation may be on the horizon. In his 60 Minutes interview, Fed Chairman Bernanke conceded that with the government printing money, inflation is a future concern. Depositors may want to think twice about investing in longer-maturity deposit accounts and Treasuries considering the threat of future inflation.