Fading of inflation helps buyers and borrowers

[May 20, 2010]  WASHINGTON (AP) -- It's a good time to buy a car, refinance a mortgage, hit the road or shop for clothes.

Invest in a saving account? Forget it.

Consumer inflation has all but disappeared, the government reported Wednesday. The Federal Reserve may now be emboldened to keep interest rates at record lows well into next year -- and possibly into 2012.

As a result, banks' prime lending rate will stay at its lowest point in decades. That figure is used to peg rates on credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans. Rates on fixed-rate mortgages remain low, too, thanks to a growing belief that the Fed will further delay any rate hike.

So what do persistent low inflation and record-low rates mean for consumers?

• The time is right to buy a car. New-car prices were flat in April. And they've fallen 1 percent over the past 12 months. Big banks are offering super-low rates in the 3 percent to 4 percent range, says Greg McBride, senior financial analyst at Bankrate.com. Normally, such rates are available only to companies, not individuals, McBride says.

• For homeowners who qualify, it's a good time to refinance. That's especially true for those who want the security of a long-term fixed-rate loan. Rates on 30-year mortgages dipped last week to 4.93 percent, the lowest level of the year. Homeowners who took out adjustable-rate mortgages at 4.5 percent in 2005 are now seeing their rates fall to 3 percent to 3.25 percent, McBride says. As a result, they have extra cash to spend.

• Minimum payments remain low on home equity lines of credit. The average nationwide rate on a $30,000 home equity line of credit has dipped to 5.14 percent. It's true that lines of credit have become much harder to obtain since the financial crisis erupted. But for those who qualify, the rates are historically low.

• People planning to drive to a vacation getaway won't pay as much. Gasoline prices fell sharply in April -- 2.4 percent. Analysts expect further declines this summer because crude oil prices have fallen nearly 20 percent since April.

• Shoppers who want to update their summer wardrobes, and those hankering for cakes and cookies, are in luck. Prices for clothing and baked goods dropped in April and are down sharply over the past year.

Yet for savers, the prospect of persistent record-low rates is a downer. It means no relief from puny returns any time soon. The average yield on a one-year certificate of deposit has sunk to 0.7 percent, according to Bankrate.com. That's the lowest since Bankrate starting tracking the figure in 1983. Rates hovered as high as 5.5 percent around 2000, according to Bankrate.

Low rates might be leading some retirees to lock their money into longer-term CDs or other savings vehicles in pursuit of higher rates, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. That strategy could backfire if inflation were to eventually flare up, Ablin noted. It would erode their savings.

Unlike everyone else, savers won't benefit until the Fed starts boosting interest rates. Yet prospects for the Fed to start pushing up rates in the fourth quarter of the year seem to be fading. More economists now think an increase won't happen until next year at the earliest.

"I had been convinced the Fed would move this year," said Joel Naroff, president of Naroff Economic Advisors. "But the odds are rising that the Fed will wait until next year to boost rates."

What's keeping inflation so low that the Fed can hold rates down without fear of igniting prices?

Lots of slack in the economy: Factories and other businesses are operating well below full throttle. Workers are getting meager raises, or none at all. And companies are wary of jacking up prices because many consumers aren't spending freely -- and they have no plans to.

[Associated Press; By JEANNINE AVERSA]

AP Business Writer Candice Choi in New York contributed to this report.

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