We know that inflation means the prices of goods and services are driven up over time. It’s why we can’t go see a movie for a mere nickel anymore. But how does inflation affect your savings accounts?
To find out, MagnifyMoney sifted through more than 12,600 personal savings accounts and 1-year certificates of deposit (CDs) to determine how many of these accounts beat out inflation. The results were underwhelming for savers, with very few savings accounts and CDs beating the rates of inflation at the time.
Comparing savings accounts to inflation indicates how much your money is actually worth after your pay interest. If interest is higher than inflation, your savings will buy more now than it could previously. Specifically, we looked at the following inflation measures from January 2020:
- Consumer Price Index (CPI) annualized rate of 2.50%
- Core CPI (CPI minus food and energy prices) rate of 2.30%
- Personal Consumption Expenditure (PCE) rate of 1.73%
- Key findings
- Why most savings accounts and CDs aren’t outpacing inflation
- High-yield savings or CD accounts that can help you beat inflation
- In early 2020, only nine of the over 7,200 savings accounts reviewed offered an APY greater than the CPI rate at the time (2.50%). Only one savings account earned at a rate equal to CPI.
- CDs didn’t fare much better against CPI — only 13 of nearly 5,400 1-year CDs were yielding a 2.50% APY or higher. Here again, only one CD account had an equal rate of 2.50%.
- Comparing savings and CD accounts against Core CPI barely improved the overall results.
- Just 10 savings accounts earned at higher rates than the Core CPI rate of 2.30%, which is not much better than in comparison to the CPI (nine accounts).
- There was a bit more variability in 1-year CDs. There, 29 CD accounts earned above Core CPI rate of 2.30%, while six accounts earned at the same rate.
- Savings and CD accounts performed better against the lower PCE rate of 1.73%.
- Here, 85 savings accounts posted a rate at or above 1.73%. Still, this was only 1.20% of the savings accounts we looked at.
- When measured against the PCE, 1-year CD rates were even more competitive, with 20% of CDs offering rates that were better than that index’s inflation rate.
Why most savings accounts and CDs aren’t outpacing inflation
On the whole, most banks and credit unions offer unremarkable interest rates on their deposit accounts, with little chance of beating inflation rates. The average savings account rate among over 7,200 savings accounts at banks and credit unions across the U.S. is only 0.27% APY. For CDs the news is a little better — the average 1-year CD rate among nearly 5,400 banks and credit unions is 1.13% APY.
Of the 7,227 savings accounts we looked at, a whopping 5,873 accounts earn between 0.01% and 0.25%. Half of these savings accounts yield a 0.15% APY or less — just as they did in 2019.
With inflation hovering at or around 2% — the Federal Reserve’s inflation goal — the majority of savings account holders won’t ever keep up with or beat inflation. And unless the interest paid on your savings account keeps up with the rate of inflation, the purchasing power of your savings will decrease over time.
Check out how the rest of the savings accounts performed below.
There was a much wider range of 1-year CD rates among the 5,382 1-year CD accounts we looked at. Half of the 1-year CDs we reviewed yield 1.21% or less annually.
The largest cohort of CD accounts (843) earned between 1.51% and 1.75% APY. Using the inflation measures listed above, this would marginally beat out only the PCE index, which clocked in at 1.73%.
If we assume a 2% inflation rate, 261 of these CD accounts would beat out inflation, allowing you to keep your money’s purchasing power. Still, in the real world, inflation is constantly fluctuating, which introduces some interest rate risk with relatively short-term accounts like a 1-year CD. For example, if you buy a 1-year CD at 2.50% now, but in the next year inflation climbs to 4%, your investment wouldn’t keep up.
High-yield savings or CD accounts that can help you beat inflation
In general, no matter which measure of inflation you use, only the banks and credit unions that consistently offer the best savings accounts and best CD rates will outperform the current rate of inflation. Consistency is key here since inflation is constantly fluctuating. Watch out for promotional or teaser rates that apply only for a certain amount of time or for select balances.
Here are some of the most consistently competitive savings accounts, which have maintained their high rates for the past two years:
- Ally Bank:1.25% APY, $0 minimum deposit
- American Express:1.15% APY, $0 minimum deposit
- Barclays:1.15% APY, $0 minimum deposit
- Capital One:1.15% APY, $0 minimum deposit
- Marcus by Goldman Sachs®:1.30% APY, $0 minimum deposit
Here are some of the best 1-year CD accounts, maintaining their competitive rates for the past two years:
- Ally Bank:1.25% APY, $0 minimum deposit
- Barclays:1.00% APY, $0 minimum deposit
- Discover:1.25% APY, $2,500 minimum deposit
- Marcus by Goldman Sachs®:1.30% APY, $500 minimum deposit
- Synchrony Bank:1.00% APY, $2,000 minimum deposit
MagnifyMoney pulled data from 7,227 personal savings accounts and 5,382 1-year CDs at banks and credit unions available in the U.S. We then compared these rates to three different measures of inflation to determine the percentage of savings products with annual percentage yields that are greater than that of inflation. We used the following inflation numbers from January 2020: the Consumer Price Index annualized rate of 2.50%, the Core CPI rate of 2.30% and the Personal Consumption Expenditure rate of 1.73%. Banks were surveyed in January 2020.