Here's What the Latest Inflation Data Could Mean for Savers

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KEY POINTS

  • In April, the Consumer Price Index rose 4.9% on an annual level.
  • While that's likely to lead to higher borrowing costs for consumers, it could also lead to higher interest rates for savings accounts and CDs.

Inflation has been surging since the latter part of 2021. And at this point, consumers are no doubt tired of paying higher prices for just about everything.

Unfortunately, it looks like inflation is holding steady at stubbornly high levels. In April, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, was up 4.9% on a year-over-year basis. It also rose 0.4% from March. 

April's inflation reading is unlikely to sit well with the Federal Reserve, which has made it clear that it really wants to see inflation get down to 2%. As such, the Fed is likely to continue implementing interest rate hikes until inflation declines even more. 

That's not a good thing from a borrowing perspective. But from a savings perspective, it can be quite beneficial.

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Rate hikes are good for savers

The Fed has been implementing interest rate hikes for more than a year to slow the pace of inflation, and those rate hikes have driven the cost of consumer borrowing up. To be clear, the Fed is not in charge of setting rates for things like auto and personal loans. Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing. 

But when the Fed raises its federal funds rate, the cost of consumer borrowing commonly increases, putting a burden on those who need to borrow money. What also tends to happen, though, is that rate hikes lead to higher interest rates for products like savings accounts and CDs. So savers with money in the bank could benefit from the fact that inflation levels were still high in April.

In fact, right now, you might manage to snag a 4% interest rate on your money in a high-yield savings account. And if you're willing to tie some money up in a CD (certificate of deposit), you might snag an interest rate as high as 5% (or even more).

And that's just based on what these accounts are paying at present. If the Fed raises interest rates again on the heels of April's CPI reading, you might get to earn even more interest on the money you have in the bank.

Rampant inflation is still not a good thing

Let's be clear -- while April's CPI data might lead to another Fed rate hike, and while that might end up being good for savers, soaring inflation is something consumers should continue to wish away. You might be earning more money on the cash you have in the bank. But chances are, in return, you're spending more money to do things like put food on the table and pay your electric bill.

But the broader issue is that higher levels of inflation could have a negative effect on the economy. When it costs companies too much money to procure parts and inventory, for example, they might have to compensate by laying off staff, since they have to obtain the components they need to sell their products. 

We've already seen a number of large companies announce layoffs since the start of 2023. And the problem might only get worse as inflation drives more employers to aggressively conserve funds. So even though savers might welcome another Fed interest rate hike, they should instead hope that inflation levels continue to dip so the central bank can leave interest rates where they are, or even start to bring them down.

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4.00/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
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