U.S. inflation surged 0.8% in November, as prices rise at the highest rate in 39 years

By David Enna, Tipswatch.com

This time, the economists just about got it right.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8% in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 6.8%, the largest 12-month increase in more than 39 years, since the period ending June 1982.

Those numbers came close to matching the consensus forecasts of 0.7% for the month and 6.8% for the year, so these increases shouldn’t surprise the stock and bond markets. (S&P 500 futures are up nicely in premarket trading this morning.) In recent months, economists have been woefully underestimating U.S. inflation. I think they’ve gotten the memo: Inflation is here, with a vengeance.

Core inflation, which strips out food and energy, came in at 0.5% for the month and 4.9% for the year, matching consensus estimates. That annual rate is the highest for core since 1991.

The BLS noted that the November surge in inflation was due to broad price increases across the economy, with the indexes for gasoline, shelter, food, used cars and trucks, and new vehicles among the larger contributors. For example:

  • Gasoline prices were up a strong 6.1% for the month, and are now up 58.1% over the last year.
  • The costs of food at home rose a painful 0.8% in November, after rising 1.0% in October and 1.2% in September. The BLS said prices increased in all six major grocery store indexes. Overall, food costs increased 6.1% over the last year.
  • Prices for used cars and trucks increased 2.5% for the month, matching the October increase, and are now up 31.4% over the last year. Prices for new vehicles were up 1.1% for the month.
  • Shelter costs rose 0.5% for the month, and are up 3.8% over the last year.
  • Apparel costs rose 1.3% in November, and are up 5.0% over the last year.
  • The costs of medical care services increased 0.3% for the month and are up a moderate 2.1% for the year.

While gasoline is often a major factor in rising U.S. inflation, the November report demonstrates that prices are surging across most key areas of the U.S. economy: Food, shelter, transportation, clothing. Here is the 12-month trend for all-items and core inflation, showing the stunning surge higher beginning in March 2021:

Because of the relatively low annual inflation indexes for December 2020 to March 2021, it’s clear that official U.S. inflation could continue running “hot” well into 2022, before possibly moderating in the spring and summer months.

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances for TIPS and set future interest rates for I Bonds. For November, the BLS set the inflation index at 277.948, an increase of 0.49% over the previous month.

For TIPS. The November inflation report means that principal balances for all TIPS will increase 0.49% in January, following an increase of 0.83% in December. TIPS principal balances will be up 6.8% for the year ending in January. Here are the new January Inflation Indexes for all TIPS.

For I Bonds. November inflation was the second in a six-month string, from September 2021 to March 2022, that will determine the I Bond’s next inflation-adjusted variable rate, which will be reset May 1. Two months into this period, inflation has increased 1.33%, which would translate to a variable rate of 2.66%. Four months remain, and a lot can happen in four months.

Here are the numbers so far:

I Bonds currently offer a composite rate of 7.12%, annualized, for six months, and are on track to have another very attractive rate at the May 1 reset. If you haven’t bought a full allocation of I Bonds this year — $10,000 per person per calendar year — try to get that done by Dec. 31. The purchase cap will reset on January 1, allowing another $10,000 per person purchase.

What this means for future interest rates

There was a lot of talk this week on CNBC that the November inflation report could push U.S. inflation above 7.0%. That was classic “managing expectations.” Instead, inflation came in close to the consensus estimates, and even though 6.8% inflation is unsustainable, Wall Street can let out a sigh.

Because prices are increasing across a wide spectrum of the U.S. economy, and this trend looks likely to continue for several months, the Federal Reserve will continue be under pressure to “look like” it is working to control inflation. That will mean speeding up a reduction of its bond-buying quantitative easing, and eventually, increases in short-term interest rates.

Every month U.S. inflation continues to rise to 39-year highs, we get two months closer to increases in short-term interest rates. Could we see three rate increases in 2022, putting the federal funds rate to a somewhere above 0.75%? This seems highly possible, and reasonable.

Here are some thoughts from “Inflation Guy” Michael Ashton, posted this morning on Twitter:

So wrapping this up…what does this mean for the Fed? In the Old Days, the Fed by now would have already tightened a bunch. Currently, we’re talking about reducing the amount they add in liquidity, maybe a little faster. And possibly raising rates in 2022.

That is, UNLESS stocks drop like a stone. And honestly, it’s not really clear to me that the government would care to see much higher interest costs on the debt. Only way Japan has survived its mountain of debt is that is it almost interest-free, after all.

But maybe the hawks will storm the Eccles Building and the Fed will not only raise rates, but also slow money growth (these were once tightly connected; now not so much, and it’s the money growth part that matters not the interest rate part). We can hope.

More on I Bonds:

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in I Bond, Inflation, Investing in TIPS, Savings Bond. Bookmark the permalink.

7 Responses to U.S. inflation surged 0.8% in November, as prices rise at the highest rate in 39 years

  1. Rob says:

    David – Great articles as always.

    I can still think of a case for EE Bonds. If the money is part of an emergency cash fund anyway, it could make sense to leave it in EE Bonds as long as bank interest rates remain low because you would be accomplishing the same thing and the EE bonds would be more liquid than a CD. And CDs don’t pay much more than EEs or Money Market. If inflation calms down the 20 year doubling will make the EE Bonds once again attractive. Of course if bank interest rates rise, then there might not be much case for EE bonds at all unless EE rates rise as well.

    • Tipswatch says:

      I’m a fan of EE Bonds for people with a comfortable 20-year time horizon, and I suspect they will end up outperforming an I Bond with a fixed rate of 0.0%, because inflation is likely to average less than 3.5% over the next 20 years. (The market is pricing in only 2.47% inflation.) But I just can’t get excited about the 0.1% return in first 20 years.

  2. BT says:

    Good read. Then all your post are. Whatever occurs, will keep buying I Bonds at 10K per year. Jan. 1st or 2nd 2022 another 10K in I Bonds. I’m not so sure if I’ll have the same loyalty holding my VTAPX. It may make sense to sell that fund and move to a better investment depending upon the economic climate, and of course tax consequences determine much too about how to proceed with any sale of a fund. Well remember the Carter years of high inflation and the stress it caused my father. Dad (and mom) passed this year, and now I’m worrying about my retirement savings much as my father did. Everyone stay safe and have a peaceful, low-stress holiday season.

    • Tipswatch says:

      I hold the ETF version (VTIP) of VTAPX in a tax-deferred account. It definitely has downside risk, which you don’t get with I Bonds. If shorter-term real yields rose 100 basis points (which could easily happen if the Fed begins raising short-term interest rates) then the fund’s value could drop 2.5%. Inflation could cover part of that decline, however. As far as TIPS funds go, this is one of the least-risky alternatives, but there is risk.

      • Ken G says:

        I also own VTIP. Just checked the Morningstar overview this morning, and it appears the real yield is about -3% at present. Am I reading this wrong?

        Now, looking at VTIP total return over the past year as of this morning, Morningstar shows it at 5.41%. Since CPI is up 6.8% over this timeframe, it suggests that the real yield as of one year ago was about -1.4%. This seems close to what I recall it was back then.

        So, if real yield today is -3%, does this mean that the total return in the next 12 months will lag CPI by 3 percentage points? Examples: If CPI inflation is 3% over the next year (we can hope!), VTIP total return would be flat, but if CPI grows by 10% (a runaway inflation scenario), then VTIP total return would be 7%? Is this how it works, more or less?

        The main reason I own VTIP is as an “insurance policy” against runaway inflation. BTW, I will be purchasing $10k of I-bonds as usual for myself and my wife in three weeks. I never delay!

        • Tipswatch says:

          Hi Ken, these 30-day SEC yields can be very misleading for TIPS funds, especially short-term funds, showing results that look odd for the long term. For example, there is a TIPS maturing in January trading with a real yield of -8.3%. But it has only one month remaining, and it will get a coupon payment of 0.125% in January, plus a pop of at least 0.42% for the rest of December and 0.25% in January from inflation accruals. But if you put it all together and try to project out 12 months, it looks like an unrealistically low real yield. It has only one month to go.

          I prefer to look at YTD total yield, which is 4.85% for VTIP. Also, the 12-month trailing yield, which is 3.42%. That seems reasonable to me. (Then again, with inflation running at 6.8%, that trailing yield return is definitely lagging inflation by at least 3%.).

          • Ken G says:

            Thanks, this is very helpful! I still wonder what VTIP total return could plausibly be in the next year if CPI inflation runs at, say, 5%. Certainly appears return could be significantly less than that, and as you said in an earlier comment a 100 bp increase in real yields could drop fund value by 2.5%. But as you say, there are inflation offsets. It all can be very confusing, which is why I like your blog! 😄

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