Inflation has been in the headlines since March of last year. And while it’s come down significantly since the 40-year high of 9.1% we reached in June 2022, we still have a way to go.
According to the latest Consumer Price Index (CPI) report, inflation increased 0.6% from July 2023 to August 2023. That’s the biggest monthly increase we’ve seen in over a year. Gas and housing played a large role in this increase, but as any consumer can tell you, prices are still high across the board. On the whole, increased inflation tends to harm consumers more than help them.
That said, there is one way high inflation can benefit you: when it comes to your savings. Higher rates mean greater interest on your hard-earned money.
What the inflation increase means for CDs, savings accounts
Consumers looking for any bright side in the latest inflation rise can take comfort in the fact that it could boost their savings rates.
“The good news is that, as inflation increases, interest rates typically increase soon after,” says Greg Goff, CFP, founder and financial planner at Sound Wealth Management. “This is a tactic the Federal Reserve uses to slow the economy in hopes of deflating the inflated currency back to desired levels. As interest rates increase, the interest rates on CDs, savings accounts and other fixed-income investments can also be expected to increase.”
In an economic environment where your dollar doesn’t stretch as far as it used to, taking advantage of these higher rates is one easy way to inflation-proof your finances.
What you should do now
Experts we recently spoke with largely predicted another rate hike this month, but even if the Fed decides to hold rates steady, they’re still quite high. That makes now a great time to open a certificate of deposit (CD) or a high-yield savings account.
“A high-yield savings account is a good place to keep your cash, especially if it has another job, such as being your emergency fund,” says Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth. “While rates vary daily, a high-yield savings account may get you 5% interest, while a standard savings account at your local bank may get you less than 1% in interest.”
As of September 13, 2023, the average national savings rate is a mere 0.43%. Top high-yield savings accounts, in contrast, offer rates of 5% or more. That said, these accounts are best for funds you may need to withdraw at any time since they offer flexible, fee-free access.
If you can afford to leave your cash in an account for a set period, you may be better off with a CD. These accounts often have higher interest rates in exchange for agreeing to keep your money in the account for the full term. Today’s top CDs offer rates up to 5.50%, with some of the highest rates belonging to short-term CDs, which can be particularly beneficial when rates are high and expected to go higher.
“If consumers expect inflation or interest rates to rise, they might consider buying CDs with short-term maturity dates to take advantage of current interest rates while keeping flexibility to reinvest in higher interest rate CDs soon,” says Goff.
Which type of account is best for you depends on several factors. Ultimately, you should choose an account that balances high rates with terms and conditions that meet your needs.
“When investing money into savings or CDs, understand the total cost, minimum balances, and potential penalties for pulling the funds out earlier than the stated term,” says Faron Daugs, CFP, founder and CEO of Harrison Wallace Financial Group.
Whichever account you choose, acting now will enable you to earn as much as you can for as long as you can while rates remain high.
The bottom line
The latest CPI numbers may not be welcome news for many areas of your financial life, but they can be a boon for your savings. As the Fed keeps interest rates high to combat inflation, the rate of return on CDs and high-yield savings accounts remains high as well. By opening one of these accounts today, you can take advantage of these rates to buffer your money against the less positive effects of inflation.