Rampant inflation can be both good and bad for savings accounts. Read on to find out why.
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At this point, it’s probably not a secret that inflation levels have been high since the latter part of 2021. In April, the Consumer Price Index, which measures changes in the cost of consumer goods and services, came in at 4.9% on a year-over-year basis.
But 2% inflation is generally considered to be a more optimal level — at least according to the Federal Reserve, which is tasked with overseeing monetary policy. The Fed feels that 2% inflation lends to a stable, healthy economy, whereas higher levels of inflation have the potential to negatively impact the economy and consumers individually.
When inflation levels rise, the cost of living tends to follow suit. That can put a strain on consumers — even those who earn a higher wage. And from a savings account perspective, inflation can also be a mixed bag. Here’s why.
The negative impact
When the cost of everything from food to utilities to gas increases, it becomes harder to cover all of your expenses on your paycheck alone. And in that regard, inflation can be a negative thing for savings accounts, because you might have to dip into yours — repeatedly — to cope with higher bills.
The more money you take out of your savings account, the less you have left when emergency bills pop up. And also, the lower your savings account balance, the less money you have to earn interest on.
The positive impact
While you might have to raid your savings more frequently to cope with inflation, the plus side is that inflation tends to lead to interest rate hikes. The Federal Reserve, in fact, has been raising interest rates consistently since early 2022 in an effort to bring inflation levels down.
Now, those interest rate hikes have been bad for consumers in that they’ve driven the cost of borrowing up. These days, it’s very expensive to borrow money in just about any capacity, whether you’re looking at a car loan, a home equity loan, or a personal loan.
But on a positive note, savings account and CD rates are higher than they’ve been in years. And now, people with money in savings have the opportunity to earn more interest on the cash they have in the bank.
In fact, many savings accounts are paying somewhere in the ballpark of 4% interest. If you have a $10,000 balance, 4% interest means earning $400 a year. And that $400 is risk-free, whereas if you were to invest your money in stocks or other assets whose value might fluctuate, you run the risk of losing money in the process.
All told, rampant inflation is generally not a good thing. And most consumers would probably rather see it cool off soon.
You may be enjoying a higher rate of interest on the money you have in savings right now. But remember, you’re probably also paying more for just about anything you might buy. So your best bet is generally to hope that inflation levels continue to cool as 2023 chugs along.
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