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Inflation could persist for a while. Read on to see what that could mean for your savings account.
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In May, annual inflation, as measured by the Consumer Price Index (CPI), came in at 4%. That’s a vast improvement from June 2022, when the CPI came in at 9.1% on an annual basis. But it’s also still higher than the 2% inflation the Federal Reserve has long sought to target. It’s this level of inflation, the central bank feels, that’s most conducive to long-term financial stability.
Recently, however, Bank of America CEO Brian Moynihan said the Fed most likely won’t reach its 2% inflation target until 2025. And Federal Reserve Chair Jerome Powell said in late June that he, too, does not expect inflation to return to 2% until 2025 either.
Given that inflation levels have been dropping steadily since last June, that’s somewhat surprising — but not totally so. It’s sort of like trying to lose 30 pounds. The first 20 to 25 pounds might come off quickly and steadily because they represent excess weight. It’s the last five to 10 pounds that might take a long time to shed.
Similarly, inflation isn’t as rampant as it was last year. But it may take a while to finish the descent back to 2%.
That’s not necessarily the greatest news for consumers. But it could end up being great news for your savings account.
Why inflation is good for savers
The Federal Reserve has raised its benchmark interest rate 10 times since March 2022 in an effort to cool inflation. At its most recent June meeting, it hit pause on interest rate hikes. But more hikes may be in the future to cool inflation all the way down.
That could drive the cost of consumer borrowing up, making it more expensive to do everything from signing an auto loan to carrying a credit card balance. But it could also mean that people with money in savings accounts will get to enjoy a higher interest rate on their money.
The Fed does not dictate what interest rates banks offer consumers. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing.
But when the Fed’s benchmark interest rate rises, it tends to lead to higher consumer interest rates on products like savings accounts and CDs. So while persistent inflation may not be a wonderful thing, the silver lining is that people with money in the bank might earn more interest until things cool off.
Keep tabs on your savings
It’s a good time to have money in the bank given the interest rates savings accounts and CDs are offering. But you may want to pay attention to signs of cooling inflation in the coming year in case things happen sooner than the Fed and other financial experts expect them to.
Once that happens, the Fed might lower its benchmark interest rate, and that could lead to lower interest rates for individual savers. So if you start to see signs of that happening, you may want to lock in a CD at a higher rate while it’s still available.
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