Persons seeking to avoid the risk of stocks, bonds, and many other investment options frequently put their money in banks, purchasing bank certificates of deposit (CDs).
However,
they often earn less on their CD than the rate of
inflation. They lose purchasing power over time.
Average
CD Rates Compared to the Inflation Rate
The
average annual interest rate on CDs is currently less than 2% according to a January
12, 2026 Forbes article[1], a NerdWallet article [2] updated December
15, 2025, and a Bankrate article [3] dated December 23, 2025.
That’s less than the 2.7% rate of inflation. The U.S. Bureau of Labor Statistics [4] reported that in December 2025 prices were 2.7% higher than a year ago. That means for all items in the Consumer Price Index, the overall price was 2.7% higher in December than for the same items a year ago.
Some banks apparently pay less than 1% annual interest on CDs. At a 1% rate, a $1,000 CD would only pay $10 per year. That would be equivalent to getting only a dime per $10. The picture below I took of a dime and a $10 bill illustrates this.
Reasons
CDs Pay Less Than Stocks and Bonds
One reason CDs over the long term typically pay much less than stocks and bonds is because the CDs are less risky.
One reason CDs are less risky is that the federal government’s
Federal Deposit Insurance Corporation (FDIC) insures such deposits. According
to the FDIC website [5]
“Deposits are insured up to at least $250,000 per depositor, per FDIC-insured
bank, per ownership category.”
In
contrast, a corporation may lose money, or it may go bankrupt. Stock and bond
holders could lose all their money in case of bankruptcy.
Another
reason CDs are less risky is that the CD interest rate is usually fixed for the
period of the CD. Stocks and bonds change value, although if you keep a bond
for its entire term the rate is typically fixed.
Since CDs
are a safer investment than corporation stocks or bonds, they pay less
interest.
But that
doesn’t seem to me to fully explain things. Supply and demand likely factor in.
When banks need more money, they pay more to get it. When banks don’t need much
money, perhaps due to fewer persons seeking or qualifying for loans, banks may pay
less.
Also,
banks can borrow from the federal government in addition to taking deposits from
customers. As the federal government lowers its rates, banks typically lower
theirs.
The Best
CD Rates
While the average CD rate is less than 2 percent, numerous websites that claim to list the best current rates as of January 2026 show higher rates. They list typical annual rates of 3% or 4% at banks.
But rates vary
depending on how much one deposits, how long the CD time frame is, and which bank money is deposited in. The same bank may even offer different rates to customers living in
different zip codes. Furthermore, online banks often offer higher rates than those with
bricks and mortar locations.
However,
at best CDs typically pay only 2-3 percent above the CPI. In order to earn
3% above the 2.7% inflation rate, a person would need to earn 5.7% annually on
a CD. The highest CD rates I saw on various websites were all less than 5.7%
annually.
Closing
Thoughts
The full
story of why banks often pay less than the rate of inflation on CDs is not
known to me. Maybe even the banks don’t know all the reasons for their actions.
But if banks
can get investors to deposit money in CDs at less than the rate of inflation,
it’s common sense and good business sense for them to keep rates at less than
the rate of inflation.
Consumers
who compare rates and invest at FDIC-insured institutions paying the higher rates can
help force other institutions to raise rates too. Persons may prefer a local bricks
and mortar bank that pays a lower rate to an online bank though. Seek to invest wisely.
ENDNOTES:
[1]
Benninger, Michael (reviewed by Cetera, Mike); “CD Rates Today: January 12,
2026—Rates As High As 4.94%;
Forbes; January 12, 2026, 4:40 a.m.; webpage accessed January 13, 2026; https://www.forbes.com/advisor/banking/cds/cd-rates-today-01-12-26/
[2] Burnette, Margarette (edited by Sara Clarke, co-written by Spencer Tierney, Chanelle Bessette, and Ruth Sarreal); “Average Bank Interest Rates for Savings Accounts, CDs and More”; NerdWallet; updated December 15, 2025; webpage accessed January 13, 2026; https://www.nerdwallet.com/banking/learn/average-rates-for-deposit-accounts
[3] Bennett, Karen (edited by Pippin Wilbers, reviewed by Greg McBride); “Current CD rates for January 2026”; BankRate; December 23, 2025; webpage accessed January 13, 2026; https://www.bankrate.com/banking/cds/current-cd-interest-rates/
[4] “12-month percentage change, Consumer Price Index, selected categories, not seasonally adjusted”; U.S. Bureau of Labor Statistics; webpage accessed January 13, 2026; https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
[5] “Deposit Insurance FAQs”; Federal Deposit Insurance Corporation; last updated April 1, 2024; webpage accessed January 13, 2026; https://www.fdic.gov/resources/deposit-insurance/faq
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