Why you should actually hope inflation will go up

With job numbers on the rise and the economy slowly improving, there are only a few factors still keeping the Federal Reserve from raising interest rates — and one of the main ones is inflation.

Savers are leery of inflation, and for good reason; even a low inflation rate can make a sizable dent in long-term savings if depositors are in set-it-and-forget-it mode.

“A 3 percent per year inflation rate means the cost of living is going to double in less than 25 years,” said Dan McCormack, senior vice president at U.S. Bancorp Investments. “That needs to be part of the planning process.”

But the inflation rate is tied to personal savings in more ways than one. Take, for example, the Fed’s current problem with inflation: It’s just too low. Great for savers on paper, but until inflation goes up, rates on all deposit accounts will stay skimpy, too, making it even harder to grow your money in a savings product.

If there’s any real estate left in your brain for numbers, a square block of it should go to inflation, right next to national employment numbers and the prime rate. The inflation rate informs everything from what bank account you should open to what dividends you’ll actually get — here’s why.

What Today’s Inflation Rate Means for Savers

To anyone who lived through the ‘70s and ‘80s, inflation is one of the U.S. economy’s biggest carbuncles — a “tax on modern life,” according to The New York Times (it shares that honor with utility bills and, you know, actual taxes).

It’s what allows baby boomers to wax nostalgic about various items that used to cost a nickel and why the salaries on Mad Men seem so absurdly low. Specifically, it’s when the prices of goods and services rise, as reflected in the Consumer Price Index.

The problem with inflation in 2014 is that it’s not high enough — at least for the Fed’s comfort. When a country is struggling to rebound from a recession, an anemic inflation rate isn’t a great sign; when prices are higher, companies’ profits are higher, and they can pay their workers better salaries. Then these workers can go and take out loans, and voila: Economy stimulated.

Our current inflation rate is 1.7 percent, compared to double-digit numbers in the Carter years and pre-recession highs of 3, 4 or 5 percent.

Americans should be hoping the inflation rate creeps up — at least enough to nudge the Fed into action. In recent meetings, Janet Yellen has repeatedly revisited a target inflation rate of 2 percent, which the Fed says is needed before it will consider inching interest rates back up. Luckily, that’s not a dream too far, as the inflation rate is supposed to grow about 2 percent a year for the next three years.

What Savers Can Do to Keep Pace With Inflation

While they’re waiting around for the Fed to act, depositors shouldn’t ignore the inflation rate. According to Forbes, over 25 years, a 2 percent inflation rate will almost halve your savings, reducing the purchasing power of $50,000 to $30,477.

One solution to keeping pace with inflation is circumventing standard savings accounts entirely.

“Unfortunately, because of this environment, investors must take some additional risk in order to have a chance at beating inflation — more exposure to the equity market, riskier bond choices,” said Carol Berger, a financial planner for Halcyon Wealth Management.

And there’s no lack of risky investments for savers these days. “Put some of your savings in bitcoin. It is deflationary,” Peter Klamka, CEO of Bitcoin Brands Inc., told us. (Go Google “does Bitcoin have a deflation problem” and let the experts debate whether that’s a smart idea.)

Drew Weckbach, a certified financial planner, recommended TIPS — Treasury Inflation-Protected Securities. “Their yield is directly correlated to the Consumer Price Index, which is used to measure inflation,” he said.

Bingo. Except, if you’re looking for either liquidity or accessibility, you might want to stay away from what Kiplinger called a “dowdy” product. If you want to buy them directly from the Treasury, you have to catch these securities during a government auction, or else go through a broker.

The key, McCormack said, is making use of both short-term and long-term investments. “What is going to put you in the best position to beat inflation? A well diversified portfolio,” he said. “Are CDs, savings accounts — are they part of that discussion? Absolutely. Are you going to keep pace with rising costs of inflation by putting 100 percent of your investable assets in a checking account or savings account? Now we would propose that that’s a part of an overall plan.”

McCormack recommended balancing short-term savings vehicles likes CDs with longer-term, diversified investments, evaluated annually with the help of a retirement planning program that takes factors like inflation and rising costs into account (U.S. Bank’s is the RealSteps>Retirement service).

10 Bank and Credit Union Accounts That Beat Inflation

As of September, the average savings account rate offered by banks is 0.08% — less than a twentieth of the inflation rate, meaning depositors will be losing any interest they earn, and then some.

Thank goodness for outliers. There are a number of institutions that do offer accounts with rates well above inflation; GOBankingRates’ database pulled up 22 accounts with rates higher than 1.7%. The highest rates were offered by credit unions and online banks, though some local banks also had stand-out products. Less predictably, the top 10 list was largely dominated by savings accounts, with a few longer-term CDs making appearances.

1. School Employees Credit Union of Washington, Savings: 6.00% APY

This rate applies to balances up to $500, and requires that the depositor sign up for direct deposit/payroll deduction and e-statements.

2. Guardian Credit Union, Savings: 5.095% APY

This rate applies to savings from purchases that are rounded up to the nearest dollar amount using the credit union’s Young & Free Checking account.

3. Darden Employees Federal Credit Union, Savings: 5.00% APY

The credit union’s three savings accounts offer this rate, good on deposits up to $500 (at $501, the rate reverts to 0.05%).

4. The Bank of Greene County, Savings: 4.00% APY

Both the e-Checking and e-Savings account at this bank offer a 4.00% APY on deposits up to $1,000 (above which the rate reverts to 0.15%).

5. Alabama Telco Credit Union, Savings: 3.00% APY

This rate applies to the credit union’s Centsible Savings account, which rounds up checking purchases to the nearest dollar and deposits the difference.

6. Pioneer Mutual Federal Credit Union, 2.779% APY

The credit union’s regular Share Savings account earns this rate on balances above $250.

7. Community First Bank, Savings: 2.36% APY

This rate is attached to the bank’s e-Savings account and applies to balances up to $15,000.

8. GE Capital Bank, 6-Year CD: 2.30% APY

This online-only bank offers a 2.30% APY on six-year CDs. (The institution also made the list for its five-year CD, rated at 2.25%.)

9. First Commerce Credit Union, 2.26% APY

Members must use First Commerce’s iLiveFIT! program to be eligible for this rate, which belongs to the iSave! Systematic Savings Account and applies to balances up to $1,000.

10. Barclays Bank, CIT Bank, 5-Year CD: 2.25% APY

Both online banks offer this rate on 5-year CDs. Barclays has no minimum balance to open, while CIT requires $1,000.