Inflation has been all over the news over the last couple of years. Even if you’re not tired of hearing about it, you’re probably sick of higher prices at the grocery store and gas pump.

As of March 2024, the U.S. inflation rate was 3.5% for the previous 12 months. Although inflation has cooled following the 40-year high of 9.1% in 2022, it’s still above the Federal Reserve’s long-term target of 2%, which it considers ideal for employment and stable prices.

Not only can inflation negatively impact the economy as a whole, but it can also make it tough for the average consumer to save. Let’s take a closer look at how inflation affects savings and what you can do to combat it.

What is inflation?

Inflation measures the price increase of goods and services over a set period of time — usually a year. If inflation is high, that means the price of goods and services is growing quickly. If inflation is low, prices are growing slowly.

Inflation is measured by dividing the change in the price of a product or service (or a group of products or services) by the starting price, and then multiplying that number by 100. Here’s the formula:

Inflation Rate = ((B-A)/A) x 100

For example, say you want to know the inflation rate of a carton of eggs over the last year. If eggs cost $4 now and were $3.50 a year ago, you can calculate the inflation rate with the following equation:

($4 - $3.50) / $3.50 x 100 = 14.29%

However, inflation generally refers to more than the price of eggs. The inflation rate typically measures the overall change in price for a broad group of goods and services — things like groceries, healthcare, and utilities, for example. Economists measure this with different price indexes. The most common is the Consumer Price Index, or CPI, which includes commodities such as housing, food, transportation, household supplies, and healthcare.

How does inflation affect purchasing power?

You can think of inflation as a measure of your purchasing power. Over time, prices inflate, and your dollars don’t go as far. In other words, you need more money to buy the same goods and services.

Say, for example, you used to spend $100 at the grocery store. That $100 covered your groceries for the entire week. Now, buying those same groceries costs $115. You’re not buying anything new, but your $100 doesn’t go as far as it used to.

How inflation negatively impacts your savings

Inflation negatively impacts your savings in a couple of different ways. In the short term, inflation can make it harder to contribute to savings; if you have to spend more to cover your basic needs, you’ll have less money to save.

Inflation can also erode the value of your savings over time. If you keep money in a traditional savings account — or in cash, for that matter — it’ll lose purchasing power over time because your interest earnings (if any) won’t keep up with inflation. So, what you save today won’t go as far in the future.

When inflation is high, your savings need to earn a highly competitive interest rate in order to keep up. Otherwise, your reserves effectively shrink over time.

Read more: What is the average savings by age?

How to protect your savings from inflation

While high inflation can be bad news for your savings, there are a few things you can do to protect your money. Use the following tips to minimize inflation’s negative impact on your personal finances:

• Choose a high-yield savings account: When inflation is high, it’s important to keep your savings in accounts that outpace inflation. Luckily, high inflation often leads to higher savings interest rates. To get the best rates, you’ll need to find a high-yield savings account, some of which have rates above 5%.

• Consider CDs: Certificates of deposit (CDs) tend to offer higher returns than savings accounts and lock in your interest rate for a set period of time, known as the term. But there’s a catch: You can’t touch your money until the CD matures, otherwise, you’ll be subject to an early withdrawal penalty. If you can afford to lock up some savings for a while, you can earn a highly competitive interest rate for the duration of your CD’s term, even if rates drop.

• Build an emergency fund: In response to high inflation, interest rates can rise, making it more expensive to borrow money. That’s why having an emergency savings fund is helpful. If your car breaks down or your water heater gives out, you can cover the cost without taking on expensive debt.

• Invest: The higher the inflation rate, the faster your cash loses value sitting in a bank account. Historically, investing — while not without risk — can lead to higher returns. This can enable you to continue building wealth during inflationary periods.

• Check your spending: Inflation makes it easy to spend more without noticing. So, it never hurts to check in with your budget. If you haven’t been able to save, you may decide to cut back on discretionary spending until you have a little more breathing room.