U.S. inflation increased 0.2% in September

The Bureau of Labor Statistics today released its shutdown-delayed September inflation report, showing that ‘headline’ inflation increased a seasonally-adjusted 0.2% in September, a number matching expectations.

Over the last 12 months, this index, known as the Consumer Price Index for All Urban Consumers (CPI-U), has ticked up just 1.2%, far below the Federal Reserve’s target of 2.o% and potential danger level of 2.5%.

The non-seasonally-adjusted CPI-U, which is used to adjust the principal balance of TIPS and set future inflation-adjusted interest rates on I Bonds, rose just 0.1% for the month and 1.2% for the last 12 months.

I Bond interest. The September number was the last piece of data needed to set the I Bond inflation-adjusted interest rate for November 2013 to April 2014. Based on my quick calculation, it looks like the new annualized interest rate will remain close to the current 1.18%. I’ll update when I find this number.

I Bonds also carry a permanent interest rate, which has been set at zero since May 2010. It is highly unlikely that the rate will rise above zero on Nov. 1.

Looking at September inflation. Inflation remained muted despite a fairly strong up-tick in the cost of gasoline (0.8%), fuel oil (0.9%) and piped gas service (1.8%). Food prices were flat and apparel dropped 0.5%.

‘Core’ inflation, which strips out food and energy and is closely watched by the Federal Reserve, increased just 0.1% in September, the same as in August, and is up a mild 1.7% for the 12 months ending in August.

The September numbers continue a trend of very mild inflation, especially since March 2013, a trend that leaves the door open for continued bond-buying stimulus by the Federal Reserve. The short-term effect is likely to be mildly positive for TIPS, meaning lower yields. However, longer-term, TIPS will lose support from investors if inflation is a non-factor and the Federal Reserve ever hints at stopping its bond-buying.

inflation

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