Bernanke's wrong when he claims CDs keep up with inflation

Broken pink piggy bank with scattered pennies

During his press conference this week, Ben Bernanke said something any saver would question.

"Over a longer period of time, even if you have money in a CD or some other investment vehicle, the interest rate will compensate you for inflation," the Federal Reserve chairman said. "The two are tied together."


The certificates of deposit we're buying today are keeping up with inflation? And will continue to keep up "over a longer period of time"?

I call that bull-hockey!

It's ridiculous for Bernanke to say such a thing when most of the new CDs we're buying are paying 1% or less.

In fact, the better question is whether any certificate being sold in the United States today is capable of keeping up with inflation.

The answer depends on how you define inflation.

The Consumer Price Index, the most widely watched measure of inflation, rose 3.3% during the 12 months ending in November 2011.

The "core CPI," which disregards volatile food and energy prices and is a more popular measure of prices with economists, climbed 2.3% over that year.

Of course, most Americans look at those numbers and sneer.

They think the CPI consistently understates the higher prices they pay for everything in their lives.

They're also baffled why anyone would want to talk about inflation without food and energy prices when such a huge portion of their paychecks goes to grocery stores and gas stations.

But Bernanke is not most Americans.

When he wants to check how quickly the cost of living is going up, he doesn't even look at the CPI.

The Federal Reserve favors a more conservative measure called the price index for personal consumption expenditures or PCE, which claims the inflation rate is actually lower than the CPI.

For the 12 months ending in November, it says inflation was only running at 2.5%, or 1.7% excluding food and energy.

If you buy an average-paying certificate, you can't come close to keeping up with the Fed's lowest-possible inflation rate.

According to this week's survey of major banks, the average interest rates paid on the terms we track were at record lows:

The only way to beat the Fed's PCE inflation rate is to search out the absolute best local and national deals and tie your money up for at least five years.

The top nationally available 5-year CD rates at U.S. banks now range between 1.87% APY and 1.95% APY.

You'll find six banks on our list of the best deals.

Or you can search out local deals from credit unions and community banks.

Our colleagues at just published a list of eight local deals offering between 2.40% APY and 3.09% APY.

If you want to take advantage of that 3% return, you've got to live in Grant County, Ind., and join Charles Street Community Federal Credit Union.

But the rate is real even if only a handful of savers are lucky enough to qualify for it.

You may have noticed that none of those returns comes close to keeping up with the Consumer Price Index's 3.3% inflation rate.

This leaves us with only one reasonable conclusion to draw.

The certificates we're buying today aren't keeping up with inflation today and can't be expected to keep up with inflation in the future.

It was outrageous for the Fed chairman to suggest otherwise.

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