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Why you should open a CD now that inflation is rising again
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Savers concerned about dwindling interest rates on their money woke up to some welcome news on Wednesday with the latest inflation reading showing an uptick in October. While not a positive development for the wider economy, a rise in inflation could slow interest rate cuts, two of which have been issued in the last three months. Now at 2.6%, inflation jumped from September’s 2.4%, coming in higher after September’s Fed rate cut and ahead of the November cut issued last week. That’s still higher than the Federal Reserve’s target 2% goal.
Against this volatile backdrop, savers may want to take a final chance at exploiting this inflation cycle by opening a high-yield savings or certificate of deposit (CD) account. CDs, in particular, can still be advantageous now, despite the wider rate climate cooling this fall. Below, we’ll detail three reasons why it may be worth opening a CD now that inflation is rising again.
See how much more you could be earning on your money with a top CD here now.
Why you should open a CD now that inflation is rising again
Here are three reasons why you should consider opening a CD now that inflation just rose again:
Rates are still relatively high
Sure, CD interest rates have declined this year, with 1-year CD terms feeling the greatest effect. But that doesn’t mean that rates are at the 1% mark (or less) from 2020, either. Right now, you could still secure a 4.50% rate on a 1-year CD or 4.85% on a 6-month CD. Even 3-year CDs have rates over 4% currently. But, as has been shown for most of 2024, these rates are unlikely to remain this high for much longer. So you should consider acting now in case the next inflation reading shows a move back toward that 2% goal.
Get started with a top CD account online today.
Rates could fall if inflation drops again
If inflation falls again in November or December, interest rates on CDs could fall again – even without a formal Fed rate cut being issued. If inflation and other economic indicators lead lenders to expect more rate cuts, they may start reducing their CD offers in advance, as is the norm. And Wednesday’s inflation report didn’t come in so hot that it’s unrealistic to expect additional rate reductions ahead, even if they may not be issued exactly when previously expected. Understanding this, then, it makes sense to lock in a high CD rate while you still can.
You’ll protect your money until this inflation cycle ends
CD interest rates are high – and fixed. Unlike those on regular savings accounts and even high-yield savings accounts, this fixed-rate nature ensures accurate calculations so you’ll know exactly how much you stand to earn upon account maturity. And that locked rate will remain the same even if additional rate reductions are issued during the CD’s full term. So not only will you earn a high rate, but you’ll continue to earn that high rate and thus protect your money until this inflation cycle ends.
The bottom line
The window of opportunity to open a high-rate CD account is closing, but as this week’s inflation reading underlines, it hasn’t closed completely just yet. Rates on these accounts are still relatively high but they could fall again due to any number of economic indicators. But by opening a CD now, you’ll lock in an elevated rate and add a layer of protection against additional rate volatility to come. Just be sure to only deposit an amount of money that you can easily afford to part with for the full CD term or you’ll risk having to pay an early withdrawal penalty to regain access to your funds.
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Inflation is on the rise again. That was the big economic news on Wednesday when the Bureau of Labor Statistics released its latest inflation reading. The October inflation rate moved to 2.6%, up from 2.4% in September, and is now more than half a percentage point above the Federal Reserve’s target 2% goal. While not a step in the right direction, it’s too soon to tell if the rise was an indicator of additional economic pain ahead or a temporary issue to be resolved in the months to come.
That noted, a rise in inflation may give borrowers pause, particularly if they’re considering borrowing from their home equity with a home equity loan or home equity line of credit (HELOC). While they operate in similar ways, these products don’t function identically. As such, it’s worth considering which of the two may be better with inflation rising again. Below, we’ll break down what to know.
Start by seeing what home equity loan rate you could qualify for here.
Is a HELOC or home equity loan better with inflation rising?
Everyone’s financial situation is different so it’s difficult to say which of these two options are “better” right now with inflation ticking up again. That said, there’s a compelling case to be made for home equity loans in this specific climate. Here’s why:
Home equity loans have lower interest rates
If you’re looking for the very cheapest home equity borrowing option now, home equity loans are the way to go. While close to what HELOC rates are, they’re still less expensive, averaging 8.41% now versus the 8.61% HELOCs come with. While that may not appear to be a major difference on paper, it can result in significant savings over the term of the loan, particularly considering the common repayment period lengths of 10 and 15 years. So, first, calculate the difference to determine which is more affordable for your situation. And don’t forget the different interest rate structures each product comes with.
Learn more about your home equity loan options here.
HELOC rates are variable and subject to rise again
As mentioned above, it’s premature to make any major proclamations about the future of inflation. It could fall again. If it doesn’t, however, HELOCs could become problematic. That’s because these products have variable interest rates that change monthly.
That’s a unique advantage when inflation – and interest rates – are cooling, as they’ve been this fall. But it’s a unique disadvantage when the opposite occurs, as may be likely in the weeks ahead. So, not only are home equity loan rates lower but they’re fixed, meaning that the lower rate you lock in now won’t adjust should inflation continue to rise. And that’s something that can’t be said for HELOCs.
You’ll have peace of mind
Sure, inflation could continue to drop this month and in the months ahead, making concerns over the latest reading vanish. But it could also rise again and cause interest rate adjustments. No one knows right now and that can be stressful for those borrowers with products that have variable interest rates.
By opening a fixed-rate home equity loan, however, you can take the stress of the equation and have peace of mind knowing exactly what your rate and your payment will be each month. And, if interest rates fall so dramatically in the future that it’s worth taking action, you could always refinance your home equity loan to the prevailing lower interest rate at that point.
The bottom line
The decision between a home equity loan and a HELOC is a personal one, especially now as inflation is rising again. That said, there’s a compelling argument to be made for opening a home equity loan. But you must weigh all of your options closely, particularly for home equity products that utilize your home as collateral. By carefully considering your options (and calculating your costs) you’ll better position yourself for financial success, both now and over the full repayment period.
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