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Are we earning more than we think?

Posted in Investing by RateRunner
May 30, 2009 08:00 AM - 15 Comments

If you’re like me, you groan every time you see what passes for the “best CD rates” these days.

But maybe things aren’t as bad as we think.

Why?

Because inflation isn’t eating up the profits.

Let’s say you’ve put your savings into a 12-month certificate of deposit that’s paying a very nice 5.0% APY. (And who wouldn’t like to go back to those days, eh?)

But if the inflation rate over that time was a fairly typical 3.0%, then your real, inflation-adjusted rate of return is only 2.0%.

Now lets say you only earned 2% on that 12-month CD but the inflation rate was zero. Your inflation-adjusted rate of return is still 2.0%.

Zero inflation? Yep, during the 12 months ending in May 2009, the Consumer Price Index was actually down 0.7%.

You could even argue that your return on a 2% CD during that time was more like 2.7% since the buying power of your principal actually increased in value over the past year.

It’s amazing that we don’t hear more about that. In fact, it seems that all the news reports on inflation warn that we’re in for a period of big-time price hikes because the government is “printing money” to cover the growing federal budget deficits.

So will the profits from the 2% CD you buy today get eaten up by inflation tomorrow?

No, according to a column in Friday’s New York Times by Princeton economics professor Paul Krugman.

He explains why the government “isn’t really printing money after all,” and says” the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy.”

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Comments (15)
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  1. bubba said:
    on May 30th at 12:25 pm

    Wow quoting the new york times isn’t exactly a fair report, they are in bed with obama and have a blatent liberal agenda (and not always on the side of the investor), I would have to hear a report from another source before I believe this post.

  2. brian said:
    on May 30th at 03:28 pm

    I would agree with this…….if I really believed that we had zero inflation over the past year.

  3. Jimbo said:
    on May 30th at 04:26 pm

    Don’t kid yourself! There will be inflation and lots of it! Obama spent more in the first 30 days than Bush did in both wars over the past 8 years. Check the facts! It’s gonna get ugly because there is no way to shutoff the massive supply of cash fast enough when it starts to turn around. The inflation will come and the interest rates will continue to be miserable so we’re going to get squeezed as savers!

  4. Rita said:
    on May 30th at 05:42 pm

    Everybody who did nothing wrong, everybody who managed their finances responsibly and lived within their means as taken the brunt of this Financial Terrorist attack by the Government Regulators, Bush Administration Appointees and the Banking and Clandestine Banking Industry. Yet another Spin job on the facts doesn’t help anybody when you have to pay the rent.

  5. Jesse said:
    on May 31st at 08:07 am

    Figures a guy named bubba would be a right wing loon.

  6. Andrea C said:
    on May 31st at 12:12 pm

    Paul Krugman is certainly a liberal guy, but he’s been very criticial of Obama’s handling of the economy. So to say that he’s carrying Obama’s water is not true. And besides, this is his projection for the economy, which is what he hangs his reputation on. He wouldn’t write stuff in the Times he didn’t think was right. You don’t win Nobel Prizes that way. And Krugman just won the Nobel Prize for Economics.

  7. bubba said:
    on May 31st at 04:05 pm

    ….and with a name like jesse your a tolerant liberal, unless someone disagrees with you, who’s the loon now jesse??? Grow up and stop judging people on their name. Next time stick to the post sweetie…

  8. Dr. Botkin said:
    on June 1st at 12:54 am

    My head is dizy from the spin. Just another reason against the daily deadline for a colmn. It must be written, even if the writer must make things up. If one believes inflation was less than zero percent, that person is certifiable and doesn’t buy food. The government will lie until the people with pitchforks chase the bureaucrat from their fat, non-productive easychairs.

  9. Jesse said:
    on June 1st at 08:19 am

    I’m tolerant of a lot of things but the stupidity of right wing conservatives is not one of them. And what in your post should I stick too? You made a non factual comment that couldn’t be argued either way. Basically you made an uneducated opinion on a writer that happens to have liberal views yet you’re more than likely the first one to quote a conservative writer when it suits your agenda.

  10. Carla H. said:
    on June 1st at 02:58 pm

    RateRunner makes a valid point. The real rate of return on an investment is what you make less the amount you lose from inflation. Energy costs are down so much that they’re hauling down the entire CPI. Dr. Botkin is right, in one sense. Food costs are up 3.3% over the past 12 months. But that’s only one part of the CPI. If you don’t believe the CPI is an accurate guage of inflation, then it’s pretty hard to have a reasonable conversation.

  11. the guy said:
    on June 2nd at 09:07 pm

    dude bubba,

    get a clue! just cause its from the NY Times DOESN’T mean it’s not true! Yes! they are lying to you! Which FOX NEWS commentator told you that? Bill O’rielly or Sean Hannity? The info is from a freaking Princeton Economics professor and you might actually learn a thing or two from him if you bothered to listen. Don’t follow the hype and turn every instance of non-party based discussion/information be turned into party based arguing!

  12. simplicio said:
    on June 3rd at 08:45 am

    I’m sorry, but this post is oversimplifying things. The only way to realize the gain in the purchasing power of your savings is to actually spend it!! If your intention is to save your money, then the CPI is irrelevant unless of course it stays negative for all time and that no one can predict. Who cares if inflation is negative right now if my plan is to just save my money rather than spending it on a new TV?!

    What the negative inflation is really saying is that it’s a good time to buy things rather than save money.

  13. RateRunner said:
    on June 3rd at 02:07 pm

    Carla, I think I’m in love. Want to have a beer?

  14. L said:
    on June 4th at 02:49 pm

    Don’t forget you get taxed on the earnings so this article is not accurate.

  15. Drew said:
    on June 11th at 05:45 am

    “If you don’t believe the CPI is an accurate guage of inflation, then it’s pretty hard to have a reasonable conversation”

    The CPI is not an accurate gauge of inflation. To find out a good reason why, click on my name. The prices of some goods during an inflationary cycle increase, while the price of others do not. The CPI does not separate monetary created price increases (inflation) vs prices changes caused by supply and/or demand changes of a product.

    See? I’m having a reasonable conversation based on the assumption that the CPI is not an accurate gauge of inflation. If you can’t, then that’s your problem, not mine.

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