After many months of declines, U.S. inflation rose to 3.7% this past month, according to government figures. But over the past year, national inflation has remained generally on the decline: After consumer prices in June 2022 broke a 41-year high at 9.1%, they fell month-over-month to as low as 3% just one year later.
The big question on many savers’ minds is what the latest uptick in inflation could mean for savings rates. Will it prompt the Fed to raise rates — and could that mean higher rates for savings products? Here’s what two experts say the Bureau of Labor Statistics’ latest consumer price index (CPI) report may mean for your high-yield savings account and certificates of deposit. (See some of the highest savings account rates you can get here.)
Rising inflation, rising rates
In the past year, the Fed raised interest rates 11 consecutive times in an effort to lower stubbornly high inflation to its target rate of 2%. The Fed has so far moved the benchmark funds rate up to now 5.25%-5.5% from nearly zero just one year ago in order to move closer to that goal.
Because the Fed is so closely focused on bringing inflation back down to 2%, the latest consumer price index figures showing an incremental spike last month could very well mean further rate hikes are imminent, pros say. But it isn’t by any means certain. As Fed Chairman Jerome Powell said in his keynote address at the annual Jackson Hole Economic Policy Symposium in August: “We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” adding that “it is the Fed’s job to bring inflation down to our 2% goal, and we will do so.”
So what does rising inflation and a higher benchmark funds rate have to do with savings accounts? For one, the higher the central bank raises interest rates, the more it costs banks and credit unions to pay off their own debt.
That, in turn, prompts many of the — often small or online-only – financial institutions to raise their rates for savings products. This then brings in new customers, who are drawn by the higher potential to earn, and also allows these financial institutions to raise cash to pay off their debt and balance their own books in the process.
So, with consumer prices showing signs of overall pressure despite the amount of rate increases this past year by the Fed, Greg McBride, chief financial analyst at Bankrate, says all eyes are now likely on what steps the central bank may be taking in future meetings as a result. That said, however, McBride emphasizes that the latest inflation increase and despite what the Fed has said at previous meetings, rising inflation does not inherently mean there will be a direct impact on savings rates.
“There isn’t anything in the CPI report that changes the outlook for interest rates, which should help sustain the current high yield offers on savings accounts, money market accounts, and CDs,” says McBride, adding that “it doesn’t change the odds of an additional rate hike and there is certainly nothing to indicate that inflation has been conquered either.”
Generally speaking, he adds, this change may largely signal more of the same for already high savings rates. “More of the same for savers, which in this case is good because yields are high and inflation is still expected to recede in the coming months.” (See some of the highest savings account rates you can get here.)
That said, Nicholas Bunio, a certified financial planner at Retirement Wealth Advisors, adds, if inflation comes back down and interest rates go lower, “savings and CDs will readjust to a lower rate.” And “if prices stabilize — not decline — and rates pause, that would mean savings accounts and CDs also would not likely increase,” says Bunio.
To be sure, savings rates for both high-yield savings accounts and CDs have experienced significant increases over the past year. For savings accounts, the latest data from the Federal Deposit Insurance Corporation, or FDIC, show the average national deposit rate reached 0.43% as of Aug. 21. Last year, the average rate for savings accounts was just 0.13%, data show.
And while this is indeed a large year-over-year increase, account offerings from often smaller, or online-only banks and credit unions are often well in excess of the national average in order to compete with their larger competition and raise cash to both balance their books and pay off their own rising debt in the process. Here are just some of the best offers right now (read the full ranking of top rates for high-yield savings accounts here).
- Andrews Federal Credit Union: 5.75%
- CloudBank 24/7: 5.26% APY
- UFB Bank: 5.25% APY
The story is also quite similar when it comes to CDs. The average national deposit rate for 12-month CDs, meanwhile has reached 1.76%, according to FDIC data. Just one year ago, however, the average 12-month CD carried a rate of 0.45%. And just like with high-yield savings accounts, many banks and credit unions are offering rates well in excess of the national average. Here are the three highest earning accounts right now (read the full ranking of CDs with the best rates here).
- Alpena Alcona Area Credit Union: 7.19% APY for a 7-month CD
- Local Government Federal Credit Union: 6.5% APY for a 6-month share term certificate
- One American Bank: 5.85% APY for a 170-day CD