Will Hotter-Than-Expected March Inflation Push CD Rates Higher?

Just when you thought hot inflation had finally cooled off, out jumps some indication that the Federal Reserve may not have won the fight just yet.

The Consumer Price Index, a broad measure of how average consumer prices change for a variety of goods and services, rose 3.5% year over year in March, a 0.3% increase from February (when it was 3.2%). Rampant inflation was why the Federal Reserve hiked its federal funds rate to its highest level in over two decades, indirectly pushing rates on CDs and savings accounts higher.

Although it's been a headache for the Federal Reserve, March inflation poses a question for savers: Could new inflation data help push the best CD rates even higher? It's possible. Let's take a look at the question in more detail.

What higher March inflation could mean for CDs

First off, no, inflation data alone won't push national CD rates higher. At the very least, March inflation data could prevent CD rates from dropping any further, which has been their direction since policymakers began predicting rate cuts for the summer.

That said, rising inflation could influence CD rates if the central bank decided to increase its federal funds rate in response to it.

That would run against the inflationary narrative up until now, which has predicted three rate cuts in 2024. But another increase isn't off the table yet. In fact, in early April, Federal Reserve Governor Michelle Bowman said she would support increasing the federal funds rate, if it appeared that inflation had reversed course.

While it isn't clear if inflation has rebounded, the prospect of a rate increase is certainly less outlandish with March prices increasing. Even Fed Chair Jerome Powell recently admitted at a policy forum that it's likely going to take longer than expected to get inflation back down to an ideal range.

That doesn't mean the central bank will reverse course and start hiking rates. If anything, it just shows how quickly the conversation can change.

Could CD rates still drop in 2024?

Yes, it's certainly still possible that CD rates could drop in 2024.

In spite of March inflation, many policymakers are still confident that the next rate decision will be a cut, not a hike. The question for them is when they'll cut rates, not if. While it initially seemed likely that the first cut would happen this summer, we'll have to see what April inflation brings to make a more accurate prediction.

Since many Fed policymakers are still confident they'll drop rates in the near future, it only makes sense that banks would respond by slowly lowering rates in anticipation. In fact, I've already seen a few CD providers cut rates on their most lucrative offers. The cuts have been subtle -- no more than a few percentage points -- but it's been the clearest indicator that CD rates could be trending downward.

If you think CD rates are going to keep decreasing, now might be a great time to lock in a rate. On the other hand, if you think CD rates might reverse course, you could open a high-yield savings account. Many have rates on par with the best CDs. And since you can withdraw money freely, you could move savings into a CD when you feel more confident locking in a rate.

All in all, it's impossible to predict where CD rates will be a few months from now. Ultimately, your decision to open one should be based on your financial goals, not whether rates will climb higher. If you've assessed the risks of CDs -- like early withdrawal penalties -- and you're sure it's the right type of account for your money, now is a good time to open one. Take a look at some of today's top-paying CDs and consider combining them with savings accounts if you want more flexibility.