As expected, U.S. inflation ticked up sharply in August, rising 0.6% because of higher energy prices. This was the first increase of any kind since March. Higher gas prices accounted for 80 percent of the increase. Food prices rose 0.2 percent.
Read the full August report on inflation
The 0.6% increase in August is the ‘headline’ number (CPI-U) that holders of TIPS and I Bonds care about, because it adjusts the principal balance of TIPS upward and eventually sets the inflation-adjustment interest rate on I Bonds. So, in the crooked logic of TIPS investors, a 0.6% increase is a good thing, given the 0.3% decline in infation from April to July.
In the past 12 months, headline inflation has increased 1.7%. That’s down from a peak of 3.9% in September 2011 and below the Fed’s inflation target of 2%.
The Federal Reserve cares about ‘core inflation’ – which strips out the more-volatile energy and food. Core inflation in August was a very muted 0.1%, which should keep the Fed happy. Core consumer prices rose 1.9 percent in the past 12 months, the smallest annual increase in a year.
An Associated Press report notes that food prices have not yet figured into rising inflation:
The modest increase in food prices indicates the drought in the Midwest is not yet pushing up grocery prices. Some economists say that will happen in the comings months.
Treasury Inflation-Protected Securities 
Yeah, 10k in I bonds per year can accomoplish that goal. After that, nothing else. Being in the early 30s, I just buy the 3o year TIPS so I can get a positive real yield. I mean, looking at the stock market since 2000, you would average about 2.2% nominal per year. Not really worth the risk with the lackluster performance over the past 12 years. I firmly believe the only reason the stock market has popped back up is because helicopter Ben is printing money so Obama will win. That is the only way he can keep his job. With a Romney win, helicopter Ben will promply be fired. Not trying to be political, just stating the way I see things. It will be interesting to see next year if the 401k limits in ira limits will be raised and whether we will still be able to do a backdoor roth ira for high income earners. I’ve also done EE bonds. I figure if inflation gets out of control they have a put option and that if held 20 years you are guaranteed 3.6% yearly compound interest. Thus since 2000 the EE bonds have been a better deal than the stock market.
Earlier in the year, one had to purchase TIPS with maturity dates of 2025 in order to obtain a positive yield to maturity. Since that’s pushing the boundaries of my life expectancy, that didn’t sound too attractive. However, now you have to go out to 2040 to obtain a positive YTM! At this stage in the game just breaking even with inflation would be fine. The five and ten year TIPS are not accomplishing that. It would be nice if the there was an inflation protected investment that had a maturity date less than my statistically projected expiration date!
Jimbo, I Bonds still fit that bill, but you can only invest $10,000 per year per person in them. This latest phase of Q3 from the Fed has had a very strange effect — yields on traditional Treasuries have been rising but yields on TIPS are falling. It’s been a dramatic move. I suppose the thinking is that the Fed is committing to buying mortgage-backed securities, not Treasuries, so traditional Treasuries are feeling a hit. On the other hand, inflation fears are rising, so TIPS yields are falling. Buyers are accepting well under the rate of inflation because no other investment will rise with inflation. There are no alternatives. It is the worst time in history to be buying a super-safe investment. Super safe = zero return, and in the case of TIPS, a return that will lag inflation. If inflation is strong, TIPS buyers probably won’t care. If inflation is muted, TIPS will be a very poor investment in September 2012.