Inflation Likely To Exceed Savings Returns
June 12, 2001
For the first time in seven years, people who hold bank Certificates of Deposit (CDs) or money market mutual funds may find inflation eating up the income from those investments -- and then some -- this year and next.
- The 3-month Treasury bill yield fell to 3.5 percent on Monday; but the Conference Board predicts inflation will run at 3.7 percent this year and 3.8 percent next.
- Savers have $2 trillion in money market mutual funds -- with yields experts expect to stabilize at 3.6 percent.
- An additional $3 trillion resides in CDs -- with an average 3-month yield of 3.71 percent, according to Bankrate.com.
Here's an example of what savers might be confronted with. Assume you have $10,000 in a money-market fund earning 3.7 percent -- or $370 annually. If inflation rises to 3.8 percent, your savings have lost $380 in purchasing power -- a net loss of $10.
Savers who keep their money in passbook savings accounts are already way behind the game -- since those accounts return about 1.5 percent.
So where to put money? Stock mutual funds might be an option, having gained an average of 13.2 percent a year in the past decade. But as everyone knows, returns recently have been falling.
Source: John Waggoner and Dina Temple-Raston, "Inflation Could Outpace Savings Rate," USA Today, June 12, 2001.
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