The Labor Department today reported that ‘headline’ inflation – the measure used to adjust the principal on TIPS and the interest rate on I Bonds – rose a strong 0.6% in September, the second strong increase in two months.

Read the full CPI report.

Almost all of the increase was due to higher gas prices. Food prices rose only 0.1 percent. The cost of meat, chicken and eggs fell. Dairy prices rose.

The last two months broke a mid-year string of very low inflation, which is ‘good news’ for holders of TIPS and I Bonds. Although we all hate higher inflation, it’s the reason we buy inflation-protected securities:

‘Core’ inflation, which the Federal Reserve watches closely, rose just 0.1 percent in September, and 2% over the last 12 months, pretty much the Fed target.

What this means for I Bonds. The September number closes out the six-month period that determines the new I Bond inflation-adjusted interest rate, which will update Nov. 1. My friends on the Bogleheads forum are saying that the new rate for November to April will be 1.76%, down from 2.2% currently.

What’s next? Since gas prices are again slipping, inflation is likely to be muted in the next few months. This is from today’s Associated Press report:

Paul Ashworth, an economist at Capital Economics, said that with gas prices leveling off, overall inflation should stabilize at around 2 percent for the next several months and then decline.