How the Best CDs Can Protect You Against Today's High Inflation

Though inflation has come down from the 40-year high it registered last summer, last week's Consumer Price Index (CPI) report shows inflation is still running fairly hot at 4.90%. Fortunately, rates on certificates of deposit (CDs) have surged to records, with the top options paying as much as 5.50% APY. This gives you an excellent opportunity to lock in an interest rate that's likely to beat inflation for months or years to come.

The current sweet spot for earning as high a CD rate as possible for the longest duration is two years, where you can score 5.25% APY that's guaranteed for 24 months after you open the account. That's already enough to beat the latest inflation reading. But where a certificate of deposit can really pay off—including ones with longer terms—is if inflation rates continue to decline.

The Federal Reserve has been hiking interest rates since March 2022, with an explicit goal of tamping inflation back down to a target rate of 2%. Time will tell if and when the economy hits that level, since each of the Fed's rate hikes won't take effect right away. But since the Fed just implemented another increase in the federal funds rate two weeks ago, it's a very reasonable bet that inflation will continue dropping.

The lower it goes, the more value you'll get over time from a CD that offers a high fixed rate extending well into the future. Even the top 5-year CDs, whose rates don't beat the current inflation rate, are likely to turn into inflation-beaters sometime soon down the road.

How Today's CDs Match Up Against Inflation

Our daily rankings of the top-paying nationwide CDs offer numerous options to earn over 5.00% APY, with terms ranging from three months to two years. And 15 options pay at least 5.25% APY. You can even earn as much as 5.50% APY, but the longest term currently available with that industry-leading rate is 17 months.

Terms of three years and up don't quite out-earn the inflation rate we're seeing today. But if you're able to sock away some of your savings for one of these longer terms, you'll likely be rewarded with an inflation-beating return down the road, which will be guaranteed further into the future than if you'd chosen a shorter term.

Of course, it's important to remember that this isn't entirely an apples-to-apples comparison. First of all, inflation reports are lagging reports, meaning they indicate the rate in the previous month and say nothing about rates today, or what they will be by the end of the month. But as we've said, the cautious expectation is that inflation will continue to move lower.

Second, earnings on CDs, just like on any bank account that pays interest, are taxed as regular income. So to fully calculate what you can earn from a CD, you'd have to subtract a portion equal to the tax rate that goes with your tax bracket.

Of course, no one knows yet what the May reading for inflation will be. We won't have that answer until the next CPI report is released on June 13. And as with most economic indicators, a wide range of possible outcomes exist. Though it's expected the next reading will be lower than April's, there are no guarantees.

Will CD Rates Go Higher?

It's difficult to predict if CD rates will soon plateau or climb a bit higher. The Federal Reserve makes its rate decisions every six to eight weeks, with its next meeting scheduled to conclude June 14. And each decision is made based on the freshest economic and financial data. So with four weeks still to go, forecasts aren't considered reliable.

Still, traders who deal in interest rate futures bet on the Fed's upcoming moves throughout every trading day, and as of this writing, roughly three-quarters predict the Fed will hold steady on rates at the June meeting. Further, a majority expect that rate level to hold through the July meeting.

Those not betting on a rate pause in June are instead predicting another quarter-point rate hike. This is the minority opinion, but it is certainly possible, and if it comes true, it would almost certainly push the top CD rates even higher than those we're enjoying today.

If instead the Fed does not increase the federal funds rate in June, CD rates may be at peak levels already. Banks and credit unions will certainly be watching closely for indicators of what decision the Fed will likely make, and once they feel reasonably confident about a forecast, they may make their own rate changes without waiting for the Fed announcement.

Rate Collection Methodology Disclosure

Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD's minimum initial deposit must not exceed $25,000.

Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.