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Falling prices boost the importance of convenience

By sbup Staff

Holding money in a low-interest account can put your cash at risk of losing value to inflation over time. But inflation isn't rising right now. Prices are falling. The advent of deflation changes how consumers need to look at their savings accounts.

The Bureau of Labor Statistics today released its monthly report on the consumer price index (CPI), the most commonly used measure of inflation. The results: Prices fell 0.7 percent in December and have remained flat or declined for five consecutive months. In fact, prices in December were just 0.1% higher than they were 12 months before. (Historically, inflation has averaged around 3.1%.)

Back  July Inflation was rising at a rate of about 5%. Escalating prices posed a problem for emergency funds: Unless you found an account paying 5% interest or more, the amount of money you'd need to cover six months of expenses was rising faster than your account balance. Now that prices have reversed, you don't have to worry as much about capturing inflation-beating yield and instead can focus on convenience.

Accounts offering higher interest rates tend to require higher minimum balances and may carry higher fees. For instance, if you live in New Jersey and were looking for a money market account in which to save for an emergency fund, you could choose an account from Bank of America (BAC) offering 1.25% or one from Colonial Bank (COBK) offering 1.0% interest, each with $10,000 and $2,500 minimum balances, respectively. If you aren't worried about interest rates, however, you could choose an account from Capital One (COF) that pays 0.4% interest with only a $1 minimum balance instead.

Better yet, you could avoid the restrictions on money market accounts altogether and choose a simple savings account from Sun National Bank (SNBC) that pays 0.25% with a $1 minimum balance.

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