U.S. inflation increased 0.1% on a seasonally adjusted basis in February, the Bureau of Labor Statistics reported today, continuing a trend of very mild inflation for more than a year. Over the last 12 months, the Consumer Price Index for All Urban Consumers – (CPI-U), also called ‘headline inflation’ – increased just 1.1%.
An increase in the food index accounted for more than half of the increase in February. The food index rose 0.4% in February, but the overall energy index dropped 0.5%, with gasoline prices falling 1.7% in the month and 8.1% over the last 12 months. Apparel prices also fell 0.3% in the month.
Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in the non-seasonally adjusted CPI-U, which is used to set the inflation adjustment to principal of TIPS and establish the future inflation-adjusted interest rate for U.S. Savings I Bonds.
In February, non-seasonally adjusted inflation rose 0.4%, but the 12-month rise was the same 1.1%. At the end of February the CPI-U index stood at 234.781, a 0.2% increase over where it stood at the end of September. One more month remains to determine the new six-month inflation-adjusted interest rate for I Bonds.
At this point the I Bond inflation rate will be set to an annualized rate of 0.4%, down substantially from the current six-month rate of 1.38%. At least it may not drop to 0.0%, which seemed possible last month.
Core inflation – which strips out more-volative food and energy – also increased 0.1% in February and 1.6% over the last 12 months.
Inflation continues to run well below the Federal Reserve’s goal of 2.0% a year and ‘danger’ level of 2.5%. But the Fed doesn’t seem concerned that its tapering of bond-buying stimulus could slow prices even further. Some of February’s softness could be weather-related; not much the Fed can do about that.
Treasury Inflation-Protected Securities 
Originally, I was going to buy 10K of iBonds now and then another 10K in May. Since I’m getting more than .4% in my money market account, the iBonds don’t look like they’re worth the bother. Unless things change significantly next month, I’ll probably wait until the fall to determine if I’m going to purchase any iBonds this year.
The deflationary trend that occurred over the last six months, has made both TIPS and iBonds pretty unattractive. I got so disgusted with seeing a negative book value on some the of the TIPS that I bought last year, that I sold some of them this year. I was able to do that at a fairly good profit because the Treasury interest rates dropped significantly since they were purchased.
You can’t unload iBonds unless you’re willing to forfeit additional purchases for the current year. There’s also the 3 month interest penalty. However, at coupon rates near 0%, this isn’t much of a consideration. If deflation continues thru to this fall, I may start bailing on iBonds as well. So far, my foray into inflation adjusted securities has met with pretty mediocre results.
Right now, there are several money market accounts that are yielding close to 1%. One year CD’s are just barely above that. Three year CD’s are at 1.6%. Five year CD’s 2.25%. With just over a 1% spread between money market accounts and the 5 year CD rate, I might just sit on the sidelines for a bit. 0.4% for the next six months just doesn’t do it for me.
On the other hand, the TNX has jumped to 2.77% today. As a result of this, the YTM on the 10 year TIPS has risen to .601. That’s still below the initial offering’s .661. But it’s certainly better than it was at the end of last week. However, I’ll probably be inclined to pass on tomorrow’s auction unless it creeps up higher than .661 today.
Ed, that’s correct for the fixed rate, which is currently 0.2%. But the inflation-adjusted rate changes every May 1 and November 1, based on six-month non-seasonally adjusted inflation for end-of-September to end-of-March (the May 1 rate) and end-of-March to end-of September (the Nov. 1 rate). This formula can be determined ahead of time, and in fact we will know what the May 1 adjustment will be when the March inflation numbers come out on April 15.
Dave,
I thought that a new I bond fixed rate is what Treasury says it is — no calculation is public knowledge??