Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / The Hidden Cost Inflation Imposes on Your Savings
Transcript
- Lucas: If you have cash sitting in a savings account earning, say, 2.8 percent APY, and inflation is running at 3.4 percent, you are not growing your money. You are losing purchasing power. Luna: Right, the classic 'negative real yield' problem. But a lot of people think their savings account is safe money. It never occurs to them it's shrinking in real terms. Lucas: Exactly. And it's one of those stealthy things that doesn't show up on your monthly statement. The balance goes up — the number in the account goes up — but what that number can buy goes down. And the latest data really drives this home. Luna: Give me the numbers. What are we looking at as of May 23, 2026? Lucas: Well, the most recent CPI reading, for April 2026, came in at 332.4, up from 330.29 in March. That's an annual inflation rate of about 3.4 percent. Meanwhile, the Fed funds rate is holding at 3.64 percent. The interest on reserve balances — what the Fed pays banks — is 3.65 percent. So the policy rate is slightly above inflation. But for consumers? The average high-yield savings account is offering around 2.8 percent. Some money market funds are a touch higher, maybe 3.2 percent. But none of them are keeping pace with inflation. Luna: So even if you shop around for the best rate, you're still earning less than inflation. That's a guaranteed loss in purchasing power. Lucas: Guaranteed. And the thing is, it doesn't have to be that way. The Fed has raised rates a lot — the effective fed funds rate is at 3.64 percent. Banks are earning that on their reserves. But they're not passing it through to depositors. Deposit betas have been very low in this cycle. Banks are pocketing the difference. Luna: Deposit beta — that's the measure of how much banks pass rate hikes on to savers. And historically, banks are slow to raise savings rates, but they're quick to cut them when the Fed cuts. We've seen that pattern before. Lucas: Right. So the saver is stuck. You want liquidity, you want safety, you want your emergency fund accessible. But parking it in a traditional savings account is a guaranteed inflation tax. The question is: what can you do about it without taking on stock market risk? Luna: Let's talk about options. I've seen people move cash into Treasury bills or short-term bond ETFs. What's the yield on a 3-month T-bill right now? Lucas: The 3-month Treasury bill is yielding about 3.5 percent. So that's actually very close to the CPI inflation rate. You're basically breaking even in real terms. And since Treasury bills are backed by the U.S. government, they're as safe as cash in a bank — maybe safer, since FDIC insurance caps at $250,000, while T-bills have no cap on the full faith and credit of the government. Luna: That's a big difference. And you can buy T-bills directly from the Treasury through TreasuryDirect, or through an ETF like BIL or SHV. The yields are competitive with high-yield savings, and in some cases better. Lucas: Exactly. And there's also the state tax advantage. Treasury interest is exempt from state and local income taxes, which high-yield savings account interest is not. For someone in a high-tax state like California or New York, that's an extra boost. Luna: Okay, but what about money market funds? Some of them are yielding over 3 percent. Are they a better option? Lucas: Money market funds are a solid alternative. They invest in very short-term debt, like Treasury bills, commercial paper, repos. The yields are floating, so they tend to track the Fed funds rate. Right now, prime money market funds are yielding around 3.3 to 3.5 percent. But there's a catch: they are not FDIC insured. That said, they are regulated under Rule 2a-7 of the Investment Company Act, which imposes strict diversification and liquidity requirements. In practice, they are extremely safe, but it's a distinction worth knowing. Luna: So for someone who wants to keep their emergency fund liquid and safe, a combination of T-bills and a high-yield savings account might be the sweet spot. You get the liquidity of the savings account for immediate needs, and the higher yield of T-bills for the bulk of your cash. Lucas: That's exactly the strategy I'd recommend. Keep one to two months of expenses in a savings account that you can access instantly. Put the rest in a ladder of short-term T-bills — 1-month, 3-month, 6-month — so you have a regular stream of maturing bills to roll over or use. That way you're not fighting inflation with one hand tied behind your back. Luna: And the T-bill ladder also gives you flexibility. If rates go up, you get to reinvest at higher yields. If rates come down, you lock in the current yield for the duration of the bill. It's a simple, low-cost, low-stress approach. Lucas: Right. And I think the key takeaway is: inflation is not just about the price of eggs and gas. It's also about the silent erosion of savings. If you're not earning a real return, you're falling behind. The data shows inflation is still above 3 percent, and the Fed is holding rates steady. So the window to take action is now, before the Fed eventually cuts rates and savings yields drop again. Luna: That's a good point. The Fed funds rate is at 3.64 percent, but the market expects cuts later this year. If that happens, savings account rates will fall quickly, but T-bill rates will fall too. So locking in longer-term T-bills now — say 6-month or 1-year — could be a smart move. Lucas: Absolutely. A 1-year T-bill is yielding around 3.8 percent right now, which is actually above inflation. So you'd get a small positive real yield. That's not a huge return, but it's better than the negative real yield you're getting from a savings account. Luna: And it's still safer than chasing higher yields in riskier assets like corporate bonds or dividend stocks. For emergency funds and short-term savings, safety and liquidity are the priorities. Lucas: Exactly. So the bottom line: check what your savings account is paying. If it's below 3 percent, move that money. Treasury bills, money market funds, even some high-yield savings accounts from online banks — they are all offering better rates. Don't let inflation eat your cash while you're not looking. Luna: Good advice. And one last thing: don't forget to factor in taxes. The real after-tax return is what matters, especially for high earners. T-bills are state-tax exempt, which can be a big deal. Lucas: Right. So if you're in a 35 percent federal bracket and a 5 percent state bracket, a 3.5 percent T-bill yield becomes about 2.3 percent after federal tax, but no state tax. A savings account yielding 2.8 percent is taxed at both levels, so after tax it's roughly 1.7 percent. That's a meaningful difference. Luna: And with inflation at 3.4 percent, that after-tax savings account return is a real loss of almost 1.7 percent per year. On $50,000, that's $850 in purchasing power gone every year. Lucas: So it's worth spending an hour to set up a TreasuryDirect account or buy a money market fund. That hour could save you hundreds of dollars a year in hidden inflation tax. Luna: Love that framing. Call it the 'inflation tax' — because that's exactly what it is. Lucas: And unlike the kind you file in April, this one you can avoid with a little bit of planning. So look at your cash holdings today, and see if your money is working hard enough to keep up. Luna: Great episode. Next time we'll talk about I bonds — another inflation-protected option that a lot of people overlook. Lucas: Looking forward to it. Until then, keep your purchasing power intact.