The September inflation numbers are in, and this is a big number for I Bond investors. The number closes out the March to September period the Treasury uses to set the variable (inflation-adjusted) rate on I Bonds on Nov. 1. The new rate will be 1.54%, annualized, for I Bonds purchased from Nov. 1, 2015, to April 30, 2016.
Here is the full set of numbers, which I keep updated on my Tracking Inflation and I Bonds page:
I Bonds pay a composite interest rate comprised of two interest rates – the permanent fixed rate (currently 0.0%) and the variable inflation rate (currently -1.60% annualized). On Nov. 1, the variable rate will rise to 1.54%, but we won’t know the new fixed rate until the Treasury announcement – probably on Nov. 2 since Nov. 1 falls on a Sunday.
Eventually, this new 1.54% variable rate will activate for all holders of I Bonds, the starting date depends on when the month you first bought the I Bond. Holders of older I Bonds with fixed rates above 1.60% will appreciate the new rate, because it is essentially 3.14% higher than you were getting the last six months. Read this for more information.
On Nov. 1, it’s possible the Treasury could slightly increase the I Bond fixed rate, but I’d say that still remains unlikely. If the rate rises, I Bonds become a screaming buy in November and then again in January – since you can only buy $10,000 per person per year.
Even if the fixed rate doesn’t rise, I Bonds remain a super-safe and reasonable investment, especially since you can sell them after one year with a minor (three month) interest penalty. But there was no reason to buy them from May to November, when the composite rate was locked at 0.0%. After Nov. 1, the attractiveness returns.
The September inflation numbers
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2% in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, inflation was flat – 0.0%.
It was no surprise that energy prices were the primary cause of the deflationary number. Gasoline prices fell a massive 9.0% in the month and are down 29.6% over the last 12 months. Apparel prices also dropped, down 0.3%. Food prices, however, were up a rather sharp 0.4% and have risen 1.6% over the last year.
Holders of TIPS and I Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balances on Treasury Inflation-Protected Securities and to set future interest rates on I Bonds. In September, the inflation index stood at 237.945, down 0.16% from August’s number, which was also down 0.14%.
This means that principal balances on TIPS will continue to decline through November 2015. It’s also interesting to note that the CPI-U inflation index stood at
238.031 in September 2014. While the BLS says inflation was ‘flat’ over the last 12 months, it actually declined 0.036%, which rounds to 0.0%.
Here is the inflation trend over the last 12 months: