Why 3% is Actually Less than 0
Like a lot of folks I have gone out and gotten an account with one of the high yielding online savings banks. (You've seen the ads- ING, Emigrant-Direct and the rest). These accounts typically yield 3% or more. I was feeling smart about all the extral money I was making till I realized ...
... that I am not actaully making any money at all. The latest Barron's tells me that the trailing 12 month CPI is running at 3% (and a lot of the things I actually buy have gone up a lot more).
Taking taxes into account (State and Federal for me eat about a third of any taxable interest income) I am only getting about 2% year. Even the highest yielding savings accounts are paying an effectively negative real interest rate.
This makes me think the Fed will keep having to raise rates - to 3.5% or perhaps even higher depending on inflation.
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What your saying about savings interest rates barely breaking even is certainly true. However, when you compare it with either not getting the 3.25% or even losing alot more in the stock market like we all did last week it doesnt seem so bad to at least be staying even!
You're also making the assumption that the CPI accurately reflects true inflation. Most economists and investment bankers would argue that the CPI actually overstates inflation...
And most people who live in the real world would argue that it understates inflation.
For example the CPI uses rental prices, not purchase prices to determine the housing component of inflation (depsite the fact that 67% or so of folks own and don't rent housing).
How fast is college tuition going up? Health care? Gasoline? C'mon - open your eyes.
A well reasoned response. People who study economies and inflation are idiots. My observation of imperical data makes me an expert and any who disagrees with me is blind. Well, I know I'm convinced.
