Explain: low short-term interest rates => negative returns on money market deposits

[KingGheedora]

I'm reading this article, and the economist says:

We have had short-term interest rates at negative real levels for two years (which means anyone invested in money market funds gets less back than they put in)

How is this right? I understand that if inflation is greater than the interest rate paid on the money market accounts, then those deposits have negative returns, but I keep hearing that we currently have very low, or negative inflation.

 

[sactoking]

MM rates can be as low as 0.02%, so any inflation larger than that creates a negative real rate of return.

 

[spidey07]

MM rates can be as low as 0.02%, so any inflation larger than that creates a negative real rate of return.

Yep. There is still inflation.

 

[KingGheedora]

Ah, got it. I guess I was confused because I assumed inflation was either non-existent or below 1.0% for the past year, and I also see tons of banks that pay > 1.0% on their MM accounts (and have money in one of those right now, at 1.1%).

 

[Ionizer86]

Ah, got it. I guess I was confused because I assumed inflation was either non-existent or below 1.0% for the past year, and I also see tons of banks that pay > 1.0% on their MM accounts (and have money in one of those right now, at 1.1%).

ING Orange? That's a popular one that's been at 1.1% for a long time.

Supposedly, CPI was up 1.2% over the last 12 months. Very low, but no longer negative.

 

[mshan]

We currently have disinflation, with some risk of deflation.

 

[Juked07]

We currently have disinflation, with some risk of deflation.

Disinflation seems like a funny concept. The derivative of inflation doesn't entirely make sense to me, as it's not continuous. It seems hard to care about the rate of change when the fed has the power to change it dramatically in short periods of time, without an obvious relation to the rate of change before fed action.

 

[UglyCasanova]

The monthly percentage change in the CPI for all Urban Consumers, not seasonally adjusted is as follows:

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2010 0.3 0.0 0.4 0.2 0.1 -0.1 0.0

From Bureau of Labor Statistics

 

[UglyCasanova]

Same one, this is seasonally adjusted. They graph is just from 2008 to 2010 as well.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual HALF1 HALF2
2008 0.4 0.2 0.4 0.3 0.6 0.9 0.8 -0.1 0.0 -0.9 -1.8 -0.7
2009 0.3 0.4 -0.1 0.1 0.1 0.7 0.1 0.4 0.2 0.2 0.2 0.2
2010 0.2 0.0 0.1 -0.1 -0.2 -0.1 0.3

 

[esun]

Disinflation seems like a funny concept. The derivative of inflation doesn't entirely make sense to me, as it's not continuous. It seems hard to care about the rate of change when the fed has the power to change it dramatically in short periods of time, without an obvious relation to the rate of change before fed action.

How is it not continuous? We may only sample it occasionally, but it's not like inflation ceases to exist when we don't sample it.

 

[Juked07]

How is it not continuous? We may only sample it occasionally, but it's not like inflation ceases to exist when we don't sample it.

I mean discontinuous as in its derivative is not defined at every point.

http://en.wikipedia.org/wiki/Continuous_function#Definition_in_terms_of_limits

 

[PingSpike]

What is more amusing is the economist is pointing out that most people lose money in MM funds like that is somehow a new development.