December 11, 2023

Today’s inflation news sets the stage for a continuation of strong high-yield savings returns. 

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Inflation data helps to form the basis for the Federal Reserve’s decisions to increase, decrease or leave its target federal funds rate unchanged. And, if you’re a saver, that’s important because savings rates are closely correlated with the federal funds rate. When the Fed increases its rate, banks tend to follow with increases to savings returns. If the Fed reduces its rate, returns on savings and other deposit accounts typically decline.  

The latest data, released today, shows there was no change in overall inflation on a month-over-month basis from September to October. Consumer prices climbed 3.2% in October compared to last year, down from the 3.7% year-over-year increase that occurred in September. What this means is that the Fed’s recent rate hikes appear to be having a positive impact on inflation — and consumer prices — but the inflation rate hasn’t hit the Fed’s target rate of 2% just yet.

So, what does today’s inflation news mean for your savings? In short, it means that meaningful returns via high APYs on deposit accounts are likely still up for grabs. 

Open a high-yield savings account now to take advantage of today’s high interest rates

What the inflation news means for your savings

“The increasing interest rate environment has allowed many cash-equivalent investments, such as high-yielding savings accounts and money market funds, to offer an increasingly competitive yield in an uncertain economy,” says John Jones, investment advisor representative at Heritage Financial. And, that’s not likely to change. 

The Federal Reserve’s inflation target is 2%. While the inflation rate has slowed, October’s inflation data shows that prices are still climbing at a faster rate than the Federal Reserve wants them to. That means the Fed is likely to make one of two moves following its next monetary policy meeting:

  • It could leave rates unchanged for the third consecutive time: Inflation data is on a downward trend, and the Federal Reserve may decide to give it time to settle. If that’s the case at the December meeting, the Fed will likely leave its interest rate target unchanged
  • Or, it could increase rates: The Federal Reserve may instead take a more aggressive stance. After all, it has raised rates 11 times in the last 18 months, and inflation levels are still too high. As such, the central bank may increase rates to continue to try and cool inflation. 

Either move would be good news for savers for a few different reasons, including:   

High APYs on deposit accounts will likely hold steady

Even the highest-yielding savings accounts didn’t offer particularly attractive returns just a couple of years ago. However, following the Federal Reserve’s aggressive rate increases over the past couple of years, the rates on today’s accounts are hard to ignore. Some of the best options currently pay between 4.25% and 5.27% per year currently.

And, the Federal Reserve isn’t likely to reduce interest rates anytime soon, which means that there’s a high likelihood of continued impressive returns on high-yield savings accounts ahead. 

Tap into meaningful returns with a high-yield savings account today

The best high-yield savings accounts may continue pacing ahead of inflation

When you save money, it’s best to try and produce a positive inflation-adjusted return, which means that your money is growing faster than the price increases. 

Today’s inflation rate is relatively high. As such, you’ll need to produce strong gains if you want a positive inflation-adjusted return. But the good news is that the best high-yield savings accounts on the market today are easily beating inflation.

As mentioned above, leading high-yield savings accounts offer APYs from 4.25% to 5.27%. Considering the current 3.2% year-over-year inflation rate, that means you could be earning inflation-adjusted returns ranging from 1.05% to 2.07% with one of these accounts. 

High-yield savings accounts ease the pain of inflation

Prices are an average of 3.2% higher now than they were one year ago. As such, any money you have that’s not earning at least a 3.2% annual return is losing value. Then again, if you’re earning more than 3.2% on your money, you’re improving your buying power.

For example, let’s say the price of an apple was $1.00 last year and has risen to $1.03 this year. If you stored your dollar in a high-yield savings account with a 4.25% annual yield, your dollar will have grown to $1.0425. As a result, you can now buy the apple with $0.0125 left as profit.  

So, if you have your savings in a traditional savings account, a safe or any other savings vehicle that’s not earning at least 3.2% annually, you’re losing money. Open a high-yield savings account now to counter these losses and convert them to gains.

The bottom line

Today’s data means the Federal Reserve hasn’t brought the inflation rate down to its target quite yet, and that’s good news for savers. After all, with inflation levels still higher than the Fed would like to see, chances are that the central bank likely won’t reduce rates any time soon. As such, savers should be able to generate significant returns from high-yield savings accounts for the foreseeable future. 

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