Which CD term is best with inflation rising?

The economy has shown several signs of strength recently, such as with the unemployment rate remaining under 4%, according to the Bureau of Labor Statistics. However, a hot economy can also coincide with inflation. While inflation is down from its recent peak in 2022, it's starting to tick back up again, and it's unclear if and when it will cease to be a significant concern.

Amidst these conditions, savers may be wondering what the best certificates of deposit (CDs) are. There are pros and cons to choosing different CD terms, depending on factors like where inflation might be heading and your own financial needs.

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Which CD term is best with inflation rising?

There are a few CD terms you may want to consider now that inflation is rising. Here's what to know: 

Is a 3-month CD best with inflation rising? 

A 3-month CD could be best with inflation rising if you want to reassess CD interest rates in a few months. It's possible that interest rates will rise to combat inflation, thus this very short-term CD could position you to reinvest at a higher rate once the 3-month CD matures.

Short-term CDs such as 3-month CDs or 6-month CDs can provide more flexibility than long-term ones, says Luis Arreola, AVP, cultural development of retail at Neighborhood Credit Union.

"This approach enables consumers to avoid locking their funds into longer-term commitments during a period of uncertainty about the longevity of inflationary trends," Arreola explains.

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Is a 6-month CD best with inflation rising?

Similar to 3-month CDs, 6-month CDs have the advantage of giving savers the ability to regain access to their funds not too far into the future, and at that time you might be able to reinvest at a higher rate if inflation rises. The slightly longer horizon, however, provides a little bit more time to earn interest than a 3-month CD does.

"Deciding the best CD term depends on how long you are comfortable putting away your money, and where conventional wisdom thinks rates are heading. With the ups and downs of inflation, I would recommend a 6-month CD to investors who want a safe option while still giving them some flexibility in these uncertain times," says Lori Gravitt, assistant vice president, branch manager at Addition Financial.

"Longer than that, the Fed's rate decisions could indirectly affect CD rates up and down, and an investor might lose out on a better rate down the road if they are locked into a long-term CD," adds Gravitt.

Is a 12-month CD best with inflation rising?

With a 12-month CD, you might not be able to take as much advantage of possible increases in interest rates in the short term, compared to 3- or 6-month CDs. But it can provide a bit more certainty in case rates decline, while still giving you the ability to withdraw your funds in the not-too-distant future.

"Consumers may choose a longer-term CD to lock in a higher dividend rate if they foresee inflation and rates falling in the near future. However, short-term CDs — three to 12 months — may be better for individuals concerned about accessing their funds without risk of an early withdrawal dividend penalty," says Jaspreet Chawla, senior vice president of savings products at Navy Federal Credit Union.

Is a long-term CD best with inflation rising?

If inflation is rising, then a long-term CD isn't always the best in terms of maximizing interest rates. However, a long-term CD — past one year — can help you earn interest for longer, and if rates end up decreasing, then a long-term CD can be beneficial.

"If you believe rates are going to rise, then you would more likely favor a short-term CD so that when the rates rise, you can move to a higher-paying CD. On the contrary, if you believe rates are going to go down, then one would favor locking in a 'higher' rate now," says Bob Chitrathorn, founder and vice president of wealth planning at Simplified Wealth Management.

Other options to consider

While there are reasons to consider different CD account terms, these aren't the only savings vehicles or investments to consider, such as stocks or bonds.

"Locking up money in a long-term CD in this environment may not keep up with inflation compared to other investments," says Spenser Liszt, owner and financial planner at Motif Planning.

Plus, CDs typically have limited liquidity, especially longer-term CDs that can have stiff penalties for early withdrawals.

"Ultimately the term length decision is reliant on how long an individual does not need the money. Then they can decide what investment vehicle to participate in. For example, high-yield savings accounts are paying similar rates and do not have early withdrawal penalties like CDs," adds Liszt.