U.S. inflation ran a moderate 0.2% in July

‘Headline’ inflation, technically called the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.2% in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, CPI-U has increased 2.0%.

For TIPS and I Bond holders, the important number is the non-seasonally adjusted CPI-U, which is used to adjust the principal of TIPS and set the future interest rate of I Bonds. That number for July was zero – no change – but the last-12-months number remains at 2.0%.

Core inflation, which strips out volatile food and energy prices, was up 0.2% in July, and is up 1.7% over the last 12 months, below the Federal Reserve’s 2.0% target and 2.5% ‘danger’ level. This number, which is closely watched by the Fed, is significant because it  gives the Fed no reason to taper or halt its bond-buying stimulus.

Some highlights from the CPI-U statistics for July:

  • Energy was the biggest factor in an otherwise mild inflation month. Gasoline was up a strong 1%, and fuel oil, 1.1%. But utility gas service was down 2.8%.
  • Over the last 12 months, gasoline prices are up 5.2%.
  • Apparel was up a strong 0.6%, after posting a 0.9% increase in June.
  • Medical care services prices continued rising very slowly, up 0.1% in July and only 2.6% over the last 12 months.
  • Prices for used cars and trucks fell 0.4% and are down 2.1% over the last 12 months.

And here is the CPI trend over the last 12 months:

CPI over one yearWhat it all means. The July inflation number came in just as predicted, at 2.0% seasonally adjusted. This is a moderate rate that the Federal Reserve can live with, and it wants to see inflation rising above 2.0% a year. So today’s report shouldn’t have much of an effect on the Fed’s bond-buying, and it probably won’t have much effect on TIPS yields.

If you are looking at next Thursday’s auction of a 5-year TIPS reissue, the yield on the secondary market for CUSIP 912828UX6 closed at -0.501%, up a bit since I wrote about it last week. The Treasury’s statistical site is showing a real 5-year yield of -0.38%, substantially higher.

Update at 1:30 p.m.: While Thursday’s inflation number was muted, other economic reports out today gave a rosier economic picture:

  •  Initial jobless claims fell by 15,000 last week to 320,000, marking their lowest level since October 2007.
  • In a Wednesday report, European GDP rose 0.3% in the second quarter, better than expected and marking an end to European recession.
  • In reaction, Treasury yields rose sharply this morning, with the 10-year nominal Treasury hitting 2.77% (the highest rate of the year) and the 10-year TIPS rising to 0.57%, The 5-year TIPS, according to Bloomberg data, rose to -0.40%.
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2 Responses to U.S. inflation ran a moderate 0.2% in July

  1. Jimbo says:

    Last week the yields on TIPS sank significantly. By last Friday the only TIPS with a positive yield had maturities starting in 2022. Today, the yield on 2020 TIPS has finally crept back into positive territory. I had pretty much given-up on next week’s 5 year TIPS auction. But now, there’s an outside chance that next week’s new issue may creep into positive territory. Even if this doesn’t happen, there might be an opportunity to purchase these below par on the secondary market in the not too distant future.

    If you look at what’s happened since the beginning of the year, it’s pretty amazing. In January of this year, the 10 year TIPS new issue sold at an adjusted price of $107.50 with a negative yield of -0.630. Right at this moment, that same CUSIP has an adjusted asking price of $97.02 with a positive yield of .559. Last month, I thought that I was getting a pretty good deal when I purchased the same bond at $97.90 and a yield of .447. And, therein lies the rub. Now that the
    interest rates appear to be headed upwards, it pretty much guarantees that bonds will lose value going forward.

    Since I plan on holding these to maturity, the loss is only on paper. But, it’s sure ugly to look at the account statements! Of course, any other bond is going to have the same problem. Since CD’s are basically bonds, this holds true for them as well. If you sell a CD before maturity, you end-up paying a penalty. In the case of brokered CD’s, you have to sell them on the secondary market and take your lumps. With the exception of iBonds, TIPS are the only other thing that provides the inflation hedge. Of course, that is their main attraction.

  2. tipswatch says:

    Jimbo, I never consider the secondary value of the TIPS I hold, I only look at the par value plus inflation. My philosophy: Buy them, forget them, hold to maturity. This is what I think a ‘committed’ investor in a bond ladder should do.

    I agree that the future probably will bring higher yields, but what if China slips into some sort of economic morass, which is possible? Or the US economy starts tanking, or the stock market plummets? That would push TIPS yields lower. The most likely course is higher yields, but that isn’t anywhere near 100%.

    So I will keep building the ladder with smallish investments, and I’ll probably buy this 5-year because I don’t have a TIPS maturing in 2018. TIPS yields look stable today, so that puts the pure 5-year at about -0.29%, close to the highest yield of the year. The secondary market for this 4-year 8-month TIPS still shows -0.403%, not as attractive. I’d guess something around -0.35% if the auction was held today.

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