Can a High-Yield Savings Account Beat Inflation?

Can a high-yield savings account help you earn enough in interest to outpace inflation? The good news is, possibly. The bad news is, not always.

Inflation takes a toll on our budgets, whether it’s paying more for eggs or struggling to find affordable housing. Higher prices reduce our buying power, so our dollars don’t stretch as far for basic goods and services. 

The government has one tool for keeping inflation under control. By increasing interest rates, the central bank can slow down the economy. That makes borrowing money through credit and loans more costly, discouraging us from spending. 

But the flip side of spending is saving. The current inflationary climate has also helped boost interest rates for CDs, money market accounts and high-yield savings accounts. When annual percentage yields are high, you’re getting a greater return on your investment. 

Here’s how you can take advantage of higher interest rates to beat inflation.

How does inflation affect savings account rates?

When inflation gets too hot, the Federal Reserve pumps the brakes on the economy by raising the federal funds rate -- the overnight interest rate between banks -- making it more expensive for banks to borrow money from one another. The domino effect can lead to lenders raising interest rates for borrowing, which impacts mortgages, credit cards and auto loans.  

Since money costs more to borrow, some financial institutions offer higher interest rates on savings accounts to incentivize you to keep your cash reserves with them. However, not all banks or savings products offer high APYs, and the returns will vary across products and institutions. Some big banks continue to offer nearly nonexistent APYs on standard savings accounts.

Can a high-yield savings account beat inflation?

At bottom, inflation is driven by too much consumer demand relative to supply. There are many additional factors that can increase the cost of goods and services, including global supply-chain issues, disasters and price gouging. 

Technically, if you’re beating inflation, it means the interest on your savings is accruing at a faster rate than price growth. If inflation is rising at a rate of 3.2%, and you put your money in a high-yield account that’s earning 5% in compounding interest, you’d technically outpace the inflation rate. If your money was sitting in the standard savings account earning a 0.1% APY, you wouldn’t earn enough interest to keep pace with inflation, so you would be losing money.

Most high-yield savings accounts are outpacing inflation right now, but they haven’t always. Historically, the Fed has aimed for an annual inflation rate of 2%, with high-yield savings accounts hovering around the same range. 

If the Fed starts lowering the federal fund rate (which it’s expected to do later this year), high-yield savings account interest rates would likely decrease, potentially dropping below the inflation rate. 

Are high-yield savings accounts still worth it?

Interest rates on high-yield savings accounts are variable, which means that the rate you’re promised when you open one isn’t going to last forever. However, that doesn’t mean a high-yield savings account isn’t worth it over the long term. 

Here’s why high-yield savings accounts make sense, even if interest rates go down:

• You need someplace to keep an emergency fund: For unexpected expenses, your emergency savings fund can help save you from having to carry a balance on a high-interest credit card. A high-yield savings account offers you easy access to your cash while still letting you earn interest to help grow that cushion. 
• High-yield accounts will still be a relative winner: High-yield savings accounts almost always pay more than standard savings accounts. So, even in an environment where “high” yield looks lower than previous rates, it will likely let you earn more than traditional savings accounts.
• The fees may be lower than other options: A lot of online banks offer high-yield savings accounts with no minimum balance requirements and no monthly service fees -- a key distinction versus regular savings accounts at big banks that might cost a few bucks per month if you fail to meet certain requirements.

Are there better places to keep money that can beat inflation?

There’s no surefire strategy for preserving your purchasing power when it comes to inflation. 

In the long run, here are some options that could offer better returns than high-yield savings accounts when interest rates go down:

• The stock market: The stock market isn’t a place to park your emergency fund due to the potential for loss. Investing in the stock market involves a level of risk, since there are no guaranteed returns and you could end up losing money. However, a diverse stock portfolio has traditionally outpaced inflation over the long term -- think 10, 20 or 30 years.
• Bonds: Corporate and municipal bonds are another option with a strong track record. Instead of investing in a company, like with stocks, a bond is essentially a loan you make to the company, which it pays back. Bonds are traditionally lower-risk investments than stocks, but the returns are typically smaller.
• I bonds: I bonds, which are sold by the federal government, are designed to shield your money from inflation. These bonds pay interest based on two rates, one that is fixed for the entire term, and one that adjusts based on inflation every six months. Just keep in mind that you can’t cash in an I bond within the first year, and you’ll forfeit three months of interest if you cash it in during the first five years.
• Retirement accounts: If you’ve got some time before retirement, an individual retirement account is designed to help you build wealth at a rate that outpaces inflation in the long run. Plus, IRAs offer some tax benefits.

FAQs