This has no effect on annual inflation or on earnings for TIPS and I Bonds.
By David Enna, Tipswatch.com
While I was searching Friday for consensus estimates on the January inflation report, to be released Tuesday, I noticed something odd. The Bureau of Labor Statistics had altered the seasonally-adjusted inflation rate for December, increasing that month’s inflation to 0.1% from the once-official -0.1%.
Huh? What does that mean? Inflation increased in December, when we all thought it decreased? This is not what I needed heading into Super Bowl weekend, when I want my focus on the other green stuff … guacamole.
To be clear, these are routine revisions to the BLS’s monthly seasonally-adjusted inflation numbers, and don’t affect the annual rates of inflation, or the non-seasonally adjusted inflation numbers that are used to adjust principal balances on Treasury Inflation-Protected Securities and set future interest rates for U.S. Series I Savings Bonds.
But it’s still unsettling to learn that these revisions show monthly inflation was actually higher in October, November and December than was originally reported by the BLS. These reports move the stock and bond markets.
Now, when you go to the BLS homepage, you’ll see this statistic for December inflation, even though the “once-official” number for December was -0.1% when it was released Jan. 12:
The BLS hasn’t really supplied much information on these revisions, other than posting this statement on its website, along with a very complex Excel file:
Updated seasonal factors introduced February 10, 2023
Each year with the release of the January CPI, seasonal adjustment factors are recalculated to reflect price movements from the just-completed calendar year. This routine annual recalculation may result in revisions to seasonally adjusted indexes for the previous 5 years. Recalculated seasonally adjusted indexes as well as recalculated seasonal adjustment factors for the period January 2018 through December 2022 were made available on Friday, February 10, 2023.
Core CPI, which excludes food and energy, also saw upward revisions of 0.1 percentage points in December and November.
In these changes, the BLS is basically re-allocating its seasonal adjustments, which have no effect on the annual numbers. In essence, annual inflation of 6.5% is being reallocated across the 12 months of 2022. However, you have to wonder how consumers and financial markets would have reacted to slightly higher monthly inflation numbers in the last quarter of 2022, when “disinflation” suddenly became a buzzword.
The Reuters report on this change noted that the revisions could indicate a slight uptick in inflation in coming months:
“On the whole, we don’t see major implications for our inflation outlook coming from the updated seasonal factors,” said Daniel Silver, an economist at JPMorgan in New York. “But the stronger recent trend for the seasonally adjusted data does generate some upside risk looking ahead.”
In case you are curious, I did eventually find the consensus estimates for January inflation, which will be released Feb. 14 at 8:30 a.m. Economists are projecting monthly all-items inflation of 0.5% and an annual rate of 6.2%. Core inflation is projected at 0.3% for the month and 5.5% year over year. If those projections are accurate, annual inflation would be continuing a gradual decline.
The BLS revisions shouldn’t affect the year-over-year result for January, which remained at 0.6% in January 2022.
No effect on I Bonds or TIPS
As I noted, the 2022 revisions are focused on seasonal adjustments, so they don’t affect annual inflation or the non-seasonally adjusted numbers that are used to adjust TIPS principal balances or set future interest rates for I Bonds.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Changes are routine and hopefully they’re just as often up as down and in small amounts. The most important feature is that the process appear unbiased so as to maintain public confidence.
So the I Bond variable rate is still projected to be 0.00% ?
I wouldn’t say it is “projected” to be 0.0%, even though that is where it stands after three months of inflation. It will probably be higher, I’d guess at least 2.0%. We’ll see.
Okay, thanks. But even at 2.0% I will stop buying before May 1st. Some major banks have CD rates at 5% now. I wish the other treasury notes and bills were as easy to buy as I Bonds.
T-Bills are easy to buy if you have a Treasury Direct account. It’s the same process as purchasing an I-Bond. You should look into it.
Back in July 2022 I wrote an article about a strategy to stagger purchases of short-term Treasurys. It has a step-by-step guide for doing this in TreasuryDirect: https://tipswatch.com/2022/07/04/looking-to-put-cash-to-work-consider-short-term-treasury-bills/
Disagree with “Because of rounding, a 3.0% rate could be anything between 2.50% and 3.49%”. That would be true of a figure given as “3%”.
If you round to one decimal place, 2.50 to 3.49 rounds to 3.0. If you round to zero decimal places, then they round to 3. Nearly all government publications present inflation data to one decimal place.
The Fed looks at monthly core. The other measures are less interesting. I suggest the figures be released to two decimal places. Because of rounding, a 3.0% rate could be anything between 2.50% and 3.49%. Because the Fed and markets seem married to these data, we should be considering the actual numbers, not some rounded up or down figures.
As you say, when it comes to I-bond six-month adjustments, none of the seasonality or rounding problems matters.
The BLS releases inflation to the tenth decimal point, so December inflation was 0.1% and annual inflation is currently 6.5%. The rounding would be from the hundredth decimal point. So 6.5% could be rounded from between 6.45% to 6.54%. The inflation tracking for I Bonds is rounded to the hundredth decimal point.