The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in March on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index declined 0.1%.
This is an important inflation report, because it provides the last number needed to determine the new variable interest rate for Series I Savings Bonds, which will reset on May 1. Because non-seasonally adjusted inflation dropped 0.8% from September 2014 to March 2015, the new I Bond variable rate will fall to -1.60% annualized on May 1. That variable rate will be applied against any fixed rate that I Bonds hold, meaning that all I Bonds issued in the last 13 years will pay zero interest for six months beginning on May 1. (But the trigger date for the 0.0% period will depend on the month you first bought the I Bond, a tricky I Bond feature.)
I have updated my Tracking Inflation and I Bonds page to reflect these updated numbers.
The inflation report. An increase of 0.2% in March was expected, so no surprise there. Energy prices rose again in March, with gasoline prices rising 3.8% after a 2.1% rise in February. Fuel oil prices were up a strong 5.9%. On the other hand, natural gas prices dropped 2.7% and food prices fell. 0.2%.
Holders of I Bonds and Treasury Inflation-Protected Securities are also interested in the non-seasonally adjusted CPI-U, which is used to determine the future variable interest rate on I Bonds and to adjust the principal balance of TIPS. In March, non-seasonally adjusted CPI rose 0.6% to an index level of 236.119. That number stood at 238.031 in September, meaning non-seasonally adjusted inflation fell 0.80% from September to March. This number determines the I Bond’s new variable rate of -1.60% annualized for the six months from May to October.
What this means for I Bonds. Since the variable rate is added to the fixed rate to determine the I Bond’s composite rate, this means that the -1.6% will wipe out any fixed rate of 1.6% or lower. And that means those I Bonds will have a composite rate of 0.0% for the six months beginning in May, since the I Bond rate can’t fall below zero.
We don’t yet know what fixed rate the Treasury will apply on May 1, but the most likely number is 0.0%, where the fixed rate stands today. As a rough guide – not always accurate – the I Bond fixed rate usually falls about 1% below the yield of a 10-year TIPS. Right now a 10-year TIPS is yielding 0.05% – so unless the Treasury is feeling unusually generous, the I Bond’s fixed rate will hold at 0.0% on May 1.
Should you buy I Bonds this year? If the fixed rate stays at 0.0% on May 1, we can assume the market for new purchases of I Bonds will dry up. There’s not much sense in guaranteeing a 0.0% return, since you can wait for the rate reset on Nov. 1 and buy your 2015 allocation then. (I Bond purchases are limited to $10,000 per person per year.)
If the fixed rate rises above 0.0% – unlikely – then I Bonds again are attractive because the fixed rate stays with the I Bond for 30 years. You won’t get rich getting an extra 0.1% over inflation, but every little bit helps.
Or you can buy your annual allocation before May 1 and get six months of 1.48% annualized, followed by 0.0% annualized, for a combined rate of 0.74% for one year. Why bother?
The most logical action will be to keep your cash earning money somewhere until Nov. 1, and then deciding if the I Bond composite rate looks attractive. On Nov. 1, you could also take a long look at Series EE Savings Bonds, which currently pay 0.1% annual interest but will double in value if held for 20 years, for an effective rate of 3.5%.
(Another option: Buy the EE Bonds before May 1, to head off any possible change in Treasury policy. What if the Treasury extends the EE doubling to 25 years? Or 30 years? It could happen, since a 20-year Treasury currently pays 2.31%, well below the EE’s return.)
Here is the trend in inflation over the last 12 months: