The best long-term CDs can still beat this summer’s tepid inflation
Inflation is doing as little damage to our savings as we could possibly expect this summer.
The Consumer Price Index didn’t budge in July, the Bureau of Labor Statistics announced today, and is up only 1.4% over the past year.
That’s down from an annual rate of 1.7% in June and the smallest 12-month change since November 2010.
That’s about the best news savers can hope for on inflation, which robs certificates of deposit, savings and money market accounts of their buying power.
If you purchased a 5-year CDs paying the average return of about 1.5% APY last August, then you more or less kept up with inflation during the first year of that investment.
If you purchased one of last summer’s top paying 5-year CDs, which were selling for around 2.5% APY, you managed to beat inflation.
Even if you purchased the highest-paying 5-year CD today, you'd still be doing better than inflation by close to half of a percentage point.
With inflation running well below the average annual rate of 3.4% (going back to when the government first started tracking it in 1913), even today’s best 5- and 3-year CD rates are still able to keep up with the CPI.
But any investments shorter than that can’t do it, haven’t been able to do it for quite some time and won’t be able to do it for the foreseeable future.
The Federal Reserve’s rate-setting committee ended its final meeting of the summer by reaffirming its intentions to hold short-term interest rates at record lows through at least late 2014.
The Fed determines how much we earn on our savings by setting what's called the federal funds rate — the interest rate banks pay to borrow money that other banks have on deposit with the Federal Reserve.
It's been essentially zero since December 2008, and the Fed is determined to provide the nation's commercial banks with all the money they need, essentially for free, for another two years.
As a result, the nation’s banks and credit unions haven't needed to pay consumers for their deposits, cutting the return on our savings to practically nothing.
The ability to at least keep up with inflation has traditionally been the lowest bar for judging any type of investment.
Historically, savers could expect CDs to earn at least a point or two more than the current inflation rate.
But if interest rates continue to fall, or if inflation ticks up even a little, there might not be any new CDs capable of matching the CPI.
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