Inflation is holding steady. Here's what that means for your savings.

While there was hope that inflation would finally be on the decline, unfortunately, it appears to be holding steady. The latest data from the Federal Reserve's Consumer Price Index report shows that in September, the annual consumer inflation remained unchanged from the 3.7% increase in August. This figure is still well above the Federal Reserve's target inflation rate of 2%.

Reducing the inflation rate is imperative because inflation carries with it a number of adverse economic consequences. It raises the cost of living, erodes the purchasing power of the dollar and leads to more expensive borrowing. Just take the current mortgage rate environment, for example. In 2020 and 2021, it was possible for the average homebuyer to secure a rate of 3% on a 30-year mortgage loan — but today, the average mortgage rate hovers well above 7%.

But while persistent inflation is hardly great news for the economy, there is a silver lining for savers. During periods of high inflation, the Federal Reserve often responds by raising interest rates to cool down the economy. And, as a result, this can lead to higher savings rates.

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What the new inflation report means for your savings

When the Federal Reserve increases interest rates, it becomes more costly for banks to lend money. Many financial institutions will, in turn, elevate their savings rates to attract more customers. And, many experts say it's likely that the Fed will raise the benchmark rate at least one more time in the coming months. 

Given that the inflation rate remains unchanged as of September, there's a strong likelihood that this will happen. And, if it does, savings rates would likely climb higher as a result — meaning that you could potentially rake in more returns on your savings.

But even if another rate hike doesn't happen, the 11 rate hikes that have occurred since March 2022 have resulted in very high APYs on interest-bearing accounts. And, if you're a saver who wants to make the most of the recent and potential future interest rate hikes, one of the best ways to do that is to open an account that offers the best possible returns. 

High-yield savings accounts, for example, typically come with much higher interest rates compared to regular savings accounts. Think about a potential 5% return, or even higher, versus a meager 0.45%. On a $5,000 balance, the 5% rate can result in $250 or more in annual interest, as opposed to just $22.50. 

But what if you're seeking an even longer-term approach to your savings? This is where certificates of deposit (CDs) come into play. CDs often provide higher interest rates than regular savings accounts — and that's especially true right now. It's easy to find CDs offering rates of 5.5% or more, especially when it comes to short-term CDs. 

While CDs generally require you to keep your money in the account for the full term, they can be a smart choice for growing your savings. The interest rates are fixed, so the returns remain stable, irrespective of fluctuations in the broader economy.

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Other CD and high-yield savings accounts benefits

Regardless of the economic climate, there are compelling reasons to consider a high-yield savings account or CD, including:

• Safety and security: If you deposit your money with an FDIC-insured bank or NCUA-insured credit union, your savings are safeguarded up to $250,000 per account, per institution. What this means is that in the unlikely event of a bank failure, your money is secured by the federal government. 
• Easy access to your money: High-yield savings accounts in particular offer the flexibility to access your funds whenever necessary, typically without penalties (provided you adhere to any monthly withdrawal limits). And, while CDs require you to lock in your funds for a predetermined period, you have the option to choose a shorter-term CD if you think you'll need access to your funds sooner rather than later. Or, you can ladder your CDs to ensure you have regular access to a portion of the funds.
• Low or no fees: Many high-yield savings accounts are provided by online banks, which have lower overhead costs than traditional brick-and-mortar banks. This allows them to offer low or even no minimum balance or deposit requirements, translating into minimal or no fees for account holders. CDs, too, typically come with minimal fees — though you will typically pay a penalty for withdrawing your money early.

The bottom line

Inflation may not be good news for consumers, but making the most of its rare benefits involves maximizing your savings potential through high-yield accounts and CDs. When interest rates rise to combat inflation, savings account rates and CD rates generally follow suit, allowing savers to earn more on their deposits than during other periods. By opening a high-yield savings account or investing in CDs, you can capitalize on these enhanced rates. Just make sure to compare your options and understand the terms and conditions of the accounts to ensure that you make the right decision for your money.