The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2% in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, inflation has increased 1.7%.
This was the first decline in ‘headline’ inflation since April 2013. The August number fell well below the consensus prediction of 0.0%, primarily driven by by declines in energy indexes, especially gasoline. The energy index fell 2.6%, with the gasoline index declining 4.1% and the indexes for natural gas and fuel oil also decreasing.
Beyond energy, the CPI-U report showed modest increases in prices for food, shelter and new vehicles, all at 0.2%.
Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in the non-seasonally-adjusted inflation number, which is used to adjust the principal of TIPS and set future interest rates for I Bonds. In August, non-seasonally-adjusted inflation also came in at -0.2%, and 1.7% for the last 12 months.
I have updated my ‘Tracking Inflation and I Bonds‘ page to reflect these new August numbers. The I Bond inflation-adjusted interest rate will re-set on Nov. 1, based on non-seasonally-adjusted CPI-U for March to September. Now, with one month to go, the potential annualized I Bond rate has dropped to 1.32%. September’s number is the one missing piece.
‘Core inflation’ – which strips out food an energy – was 0.0% in August and 1.7% over the last 12 months.
The weak inflation numbers could take pressure off the Federal Reserve, which is pondering when to begin raising its pivotal short-term rate. We’ll be hearing more today from the Fed after the close of its two-day meeting.
And the negative August number could weaken demand for Thursday’s reopening of a 10-year TIPS, CUSIP 912828WU0. I’ll be checking in on that Thursday morning and after the auction.
Here is the one-year trend in seasonally-adjusted CPI-U:
Treasury Inflation-Protected Securities 
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It looks like CUSIP 912828WU0 closed today at 0.531% yield to maturity and a price of about $96.12 per $100 of value. This is up nearly 30 basis points since Sept. 1. You can watch the TIP ETF in the morning, if it is heading down, this TIPS will be fairly attractive. But you never know in any TIPS auction. Surprises happen.
I popped for a few on the secondary market today. I passed on the initial offering of the 7/2024 maturity because the YTM was under the magical 0.5% benchmark that I’ve set for TIPS purchases. The yield I got was a whopping 0.547%. It remains to be seen if tomorrow’s auction will be a better deal. So, now I’ve got the 1/2024 and 7/2024 maturities covered somewhat.
With the current 1.7% inflation rate, that amounts to 2.24% for a 10 year TIPS. That’s pretty close to the 2.27% that Melrose Credit Union is offering on a 5 year CD (with no inflation protection, of course). Time will tell if I’m being a huge sucker jumping into TIPS at this point in time. But, at least they meet my minimum goal of keeping-up with inflation (assuming there is any).
I’ve been buying small amounts over a variety of maturities since the yields went positive for TIPS with maturities 10 years and under. In fact, today there’s a TIPS with a 4/15/2019 maturity date that has a YTM in positive territory (0.053%). Because I don’t have any 2019 TIPS, I was thinking of buying it as a novelty. If the YTM creeps-up a little more, I might do that tomorrow.
I’ll just keep nibbling away at things as the opportunity occurs. Hopefully, some day before I kick the bucket TIPS will provide a decent enough coupon to make them worth buying in bulk. Like everyone else, I had expected the YTM on the 10 year TIPS to be over 1.0% by now. That’s why I take the current predictions with a grain of salt (at least until the Fed normalizes monetary policy).
Len, I actually moved a bit of money around today so that I can make a small purchase of this TIPS tomorrow, if the yields hold above 0.5%. I would like to fill that 2024 line in my TIPS ladder.
I think I’m glad I bought those munies instead of TIPS at absurdly high prices. But then I’ve been wrong before….