How does inflation affect savings? Find out if your savings account is beating inflation (2024)

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• Inflation impacts your savings by reducing the value of your money over time.
• Many high-yield savings accounts and CDs are now beating inflation with high interest rates.
• High savings account interest rates won't last forever and will start dropping once the Federal Reserve cuts rates.

Inflation has been slowing down, and you might be wondering how that affects your savings. Is your money in the right place? Can the best high-yield savings accountsbeat inflation?

Here's how savings account interest rates stack up to inflation rates — and how inflation impacts your savings over time.

Is your savings account beating inflation?

The Consumer Price Index, a tool for measuring inflation, increased 3.1% year over year in November. For a savings account to keep up with inflation, it would need to offer at least 3.1% in interest annually.

"The good news is that for the first time in a long time, savers do have options," says Davide Accomazzo, an instructor of finance at Pepperdine Graziadio Business School.

Accomazzo points out that people can earn a respectable return on low-risk savings options.

Most notably, the best money market accounts, CDs, and high-yield savings accounts pay competitive interest rates that beat inflation, many even exceeding 5% APY. If you bank with a national brick-and-mortar bank, your savings account likely doesn't offer a high enough interest rate, though.

The average savings account interest rate is 0.46% APY (Annual Percentage Yield), according to the FDIC. Many traditional savings accounts from big brick-and-mortar banks pay less than the national average. These savings accounts aren't beating inflation, so you're still losing value on your money over time.

While many high-yield savings accounts, money market accounts, and CDs are paying competitive savings rates now, they can't stay that way forever. The Federal Reserve has raised the federal funds rate throughout 2023 to fight inflation, which is why savings interest rates have gone upin the first place.

Once the Federal Reserve gets closer to bringing down inflation to around 2%, it plans to start cutting the federal funds rate. Savings account rates will likely go down as a result. When rates change, it's best to reexamine your finances at this point so you know if your money is still in the right place.

How inflation affects savings

Inflation diminishes the value of your savings over time.

Accomazzo explains that people essentially become poorer every day because the value of the dollar loses purchasing power with inflation. In other words, things you can purchase with $1 today can't be purchased with $1 in the future.

Savings accounts usually don't offer enough interest to beat inflation. That said, keeping money in a savings account is still better than keeping cash at home because at least you're earning some interest. It's also a low-risk option for your money. Up to $250,000 per depositor, per ownership category is safe in a federally insured bank account. The FDIC or NCUA keeps your insured money safe if a bank or credit union fails.

You can also protect your money against inflation by investing. Investment options tend to offer greater returns than interest-earning bank accounts in the long run, however, there is more risk involved. Experts generally recommend investing for long-term goals and using savings accounts for short-to-medium-term goals.

Inflation and savings FAQs