Inflation is up. Here's why you should open a CD now.
Those hoping for a further reduction in inflation were disappointed this week after the latest report from the Bureau of Labor Statistics showed inflation rising by 3.2% in February. That's up from the 3.1% rate in January and still more than a full percentage point above the Federal Reserve's target 2% goal. While it's come down significantly from 9.1% in June 2022, an upward trend is not positive, particularly for those hoping for interest rate cuts.
The benchmark interest rate range is currently sitting at a 23-year high and with this week's disappointing inflation report, it's unlikely that the Fed will reduce that rate when they meet again on March 19. That noted, while higher interest rates are problematic for borrowers, they're a boost for savers with certificates of deposit (CD) and high-yield savings accounts.
And with inflation still elevated, there are some compelling reasons to open one (or both) of these accounts now. Below, we'll break down three reasons why you should open a CD now that inflation is up.
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Why you should open a CD with inflation up
Here are three compelling reasons why you should open a CD following this week's inflation report.
Rates are high
CD interest rates have been higher than usual, thanks to the Fed's numerous rate hikes. It makes sense to take advantage of these unique circumstances if only to buffer the negative results of inflation felt elsewhere. With the right CD and the right rate and term, savers can potentially earn hundreds or even thousands of extra dollars over the next year.
It's simple to find a CD with a 5% interest rate now, particularly if you use an online lender. Select savers may even qualify for an account with a 6% or 7% interest rate.
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Rates will likely remain higher for longer
Now that progress with inflation has seemingly stalled, rates will likely remain higher for longer. This could be a benefit for those who want to open a CD now but are worried about losing out on accounts with higher rates to come. But if rates stay elevated for a longer period, savers won't have to worry about acting too soon.
By taking a ladder approach, in which they open multiple accounts with different maturity dates, savers can immediately start earning today's high APYs while being positioned to roll over their account into a different CD with a higher rate in the future. Simply put: Higher rates for longer give savers more options and less of an urgent need to act before they fall again.
Your savings aren't keeping up with inflation
The typical interest rate for a regular savings account is just 0.46% but the inflation rate is now 3.2%. So if your money is being kept in a regular savings account, not only are you not keeping up with inflation, you're losing money.
But it's not difficult to find a CD that exceeds the inflation rate right now, allowing you to build up your savings until the rate climate stabilizes. Just be careful with how much you deposit. If you put too much of your money into an account and need to withdraw it before the term has matured, you'll get stuck paying an early withdrawal penalty.
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The bottom line
A rise in the inflation rate isn't ideal but there are ways to protect yourself right now. A CD is a great way to do so. By opening a CD following the latest inflation news you'll be able to lock in a high rate now — and that rate will likely remain higher for longer, making this a viable option for the foreseeable future. And since CD rates are generally much higher than today's inflation rate, you'll be able to successfully counteract some of the negative effects of inflation felt elsewhere.
