Worried about inflation? A certificate of deposit may not be the answer
- When inflation rises, savers may consider alternatives for stashing cash.
- But don't bank on a certificate of deposit; those rates are at all-time lows.
As the economy quickly picks up steam in the wake of the Covid pandemic, some amount of inflation is inevitable.
On Tuesday, Federal Reserve Chairman Jerome Powell said price pressures have increased "notably" but could fade over time.
The May consumer price index jumped 5% from a year earlier, according to a report by the Labor Department, the fastest pace since just before the 2008-09 financial crisis.
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Meanwhile, interest rates are near record lows and, as a result, savers are losing purchasing power over time.
How to protect your savings from inflation
Up until a year ago, an old-fashioned certificate of deposit was a reliable way to get a decent return.
But a spike in savings, coupled with the Federal Reserve's move to hold its benchmark rate at essentially zero, has put pressure on deposit rates across the board.
"The bad news is CD yields are at record lows, the good news is they've finally stopped falling," said Greg McBride, chief financial analyst at Bankrate.com.
Currently, one-year CD rates are averaging just 0.17% and even top-yielding CDs are under 1%, according to Bankrate, which means savers are locking in funds below the rate of inflation.
The CDs that offer the highest yields typically have higher minimum deposit requirements and require longer periods to maturity. But even those yields are no better. Both three- and five-year CDs top out at about 1% right now.
Online-only banks such as Marcus by Goldman Sachs and Ally Bank are a better bet, said Ken Tumin, founder of DepositAccounts.com, even though those banks are steadily lowering their rates, as well.
"It makes sense to keep some money accessible in an online savings account, but you will still lose out in the short term to inflation," he said.
Stocks and mutual funds will beat inflation over the long haul, although those asset classes require taking on more risk.
Still, many Americans are willing to make that trade. The amount of money in CDs has been steadily declining while the number of households invested in the market has grown in recent years.
"Even income-dependent investors have started to broaden their horizons," McBride said. "With ultra-low interest rates, savers are deciding to pursue greener pastures."