An investor is deliberating between a term deposit at a bank with a guaranteed return of 4% per annum and a credit union’s inflation protection fixed date deposit that pays 2% per annum plus annual inflation rate. Both investments are for two years.

a. If the investor anticipates inflation in the first year will be 1.5%, what is the maximum inflation rate that can occur in the second year in order to make the investor indifferent to either deposit?

b. Which investment is likely safer, at least from a potential return standpoint?