When inflation is high, consumers\u2019 dollars don\u2019t go as far because goods and services are more expensive. This not-so-fun reality tends to put a damper on economic growth, and people with a lower income are disproportionately burdened because they cannot afford higher prices. But it\u2019s not a great situation for anyone. <\/p>\n\n\n\n
So, how does raising interest rates affect inflation? Learn why inflation can happen in the first place and how it can impact your online bank accounts.<\/p>\n\n\n\n
Why does inflation increase?<\/h2>\n\n\n\n
A lot of factors can increase inflation. The pandemic sparked a chain of events\u2014including supply chain disruptions, disruptions in production, and pandemic stimulus packages, per Bankrate<\/a>\u2014that helped lead to the inflationary spike between 2021 and 2022. <\/p>\n\n\n\n <\/p>\n\n\n\n First, the global supply chain, which encompasses all stages of manufacturing, assembly, and logistics that make it possible for goods to be delivered around the globe in a timely fashion, was severely impacted by illness, business closures, and travel restrictions, per Bankrate<\/a>. Simultaneously, demand for goods increased as people\u2014many working from home\u2014began ordering more things online to be shipped directly to their front doors. <\/p>\n\n\n\n It\u2019s economics 101: When demand goes up and supply goes down, prices rise. And that causes inflation.<\/p>\n\n\n\n Then, as the pandemic started to ease, another event that would lead to price shocks occurred: Russia\u2019s invasion of Ukraine. Russia is a major supplier of the world\u2019s oil. As more countries placed war-related sanctions on Russia, oil prices rose\u2014a lot. According to Bankrate<\/a>, the price of a barrel of oil nearly doubled from February 2022 (when the war began) to July 2022. <\/p>\n\n\n\n Meanwhile, the upward trajectory of a robust job market and a roaring stock market in the U.S. meant that many consumers could afford to pay higher prices at the stores and the pumps. This combination of forces can propel prices even higher and keep economists and policymakers at the Fed up at night.<\/p>\n\n\n\n Luckily, the Fed has a tool to combat runaway inflation: interest rates.<\/p>\n\n\n\n The Federal Reserve\u2019s job is to keep inflation manageable so that consumers are encouraged to spend and save. Interest rates\u2014which represent the cost of borrowing money\u2014are reflected in the annual percentage yields (APYs) of savings accounts and mortgage rates. (Learn more about how the Federal Reserve can affect mortgage rates<\/a>.)<\/p>\n\n\n\n When interest rates go up, borrowing money gets more expensive. How does this increase in interest rates affect you? Mortgages, car loans, and business loans aren\u2019t as attractive. As a result, fewer consumers are willing to take out loans to buy or invest in things. Higher interest rates tamp down demand, which usually leads to a dip in prices as well. <\/p>\n\n\n\n <\/p>\n\n\n\n Consumers are affected in other ways, too. Because interest rates on savings accounts<\/a>, certificates of deposit (CDs), and money market accounts tend to increase, people move more of their money into these savings products to reap the benefits. Here\u2019s how raised interest rates can affect those different accounts:<\/p>\n\n\n\n Banks\u2019 interest rates typically track what the Federal Reserve is doing. So if you\u2019re wondering when savings account interest rates will go up<\/a>, it\u2019s usually after a Fed rate hike. Money in a high interest rate savings account during periods of higher interest rates will yield more returns as your funds compound over time. <\/p>\n\n\n\n Certificates of deposit (CDs) offer a guaranteed interest rate for the entire term of the CD, whether interest rates are rising (or falling). That said, these savings vehicles are especially beneficial when CD rates are high<\/a> because you can lock in that rate over a set period\u2014typically between a few months and multiple years. <\/p>\n\n\n\n Money market accounts also benefit from higher interest rates. They can feature an APY that\u2019s competitive with savings accounts<\/a>, but they can also include a debit card like a checking account for easy access to your money. To get the most out of a money market account, choose one with a high APY that doesn\u2019t include fees.<\/p>\n\n\n\n<\/div>\n\n\n When demand goes up and supply goes down, prices rise. And that causes inflation.<\/p>\n <\/blockquote>\n<\/div>\n\n\n Though no one knows for sure when inflation will go up or down, here\u2019s one piece of advice that\u2019s always wise during uncertain economic times: Stay the course. That means continuing to save for retirement<\/a> and spend money wisely<\/a> to make your financial goals a reality. <\/p>\n\n\n\n Looking for a safe place to keep your savings that also offers a high interest rate so your money can grow over time? Look no further than a high interest rate online savings account.<\/p>\n\n\n\n Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.<\/p>\n\n\n\n The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover, a division of Capital One, N.A., or its affiliates.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" Interest rates can have a real impact on inflation. Learn how it works and what changing interest rates could mean for you.<\/p>\n","protected":false},"author":15,"featured_media":23035,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[76,9,5,92],"tags":[112,5108,131,72,32,39],"class_list":["post-17432","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-banking101","category-online-banking","category-saving","category-tips","tag-cd","tag-federal-reserve","tag-high-interest-rate-accounts","tag-interest-rates","tag-online-savings-account","tag-saving"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/posts\/17432","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/comments?post=17432"}],"version-history":[{"count":23,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/posts\/17432\/revisions"}],"predecessor-version":[{"id":23034,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/posts\/17432\/revisions\/23034"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/media\/23035"}],"wp:attachment":[{"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/media?parent=17432"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/categories?post=17432"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-json\/wp\/v2\/tags?post=17432"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"At](\"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-content\/uploads\/2023\/10\/How-does-raising-interest-rates-affect-inflation_In-Article-1-e1696256638679.jpg\")
<\/figure>\n\n\n\nWhat happens to inflation when interest rates rise?<\/h2>\n\n\n\n
How does raising interest rates affect inflation? <\/h2>\n\n\n\n
![\"While](\"https:\/\/www.discover.com\/online-banking\/banking-topics\/wp-content\/uploads\/2023\/10\/How-does-raising-interest-rates-affect-inflation_In-Article-2-e1696256725293.jpg\")
<\/figure>\n\n\n\nImpact of raised interest rates on savings accounts<\/h3>\n\n\n\n
Impact of raised interest rates on CDs<\/h3>\n\n\n\n
Impact of raised interest rates on money market accounts<\/h3>\n\n\n\n
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Keep saving through the ups and downs of inflation despite interest rate fluctuations<\/h2>\n\n\n\n