TIPS principal balances will fall 0.2% in January, based on non-seasonally adjusted inflation.

By David Enna, Tipswatch.com

Costs of shelter continued rising in November, offsetting declines in gas prices, resulting in seasonally-adjusted all-items inflation of 0.1% for the month, the Bureau of Labor Statistics reported today.

The all-items number came in above expectations of 0.0%, but annual inflation of 3.1% matched the consensus. Core inflation, which removes food and energy, rose 0.3% in November and 4.0% for the year, matching expectations.

On the positive side, annual U.S. inflation dropped a notch to 3.1% for the year ending in November, down from 3.2% in October. That is the lowest annual inflation rate since June.

The BLS noted that the shelter index increased 0.4% in November, after rising 0.3% in October, and was the largest factor (about 70%) in the increase in core inflation. Shelter costs are up 6.5% year-over-year. This news is likely to set off protests that CPI shelter is a lagging indicator and doesn’t reflect current conditions. But … it is what it is. More from the report:

• Food at home costs were up 0.1% for the month and 1.7% year-over year. U.S. consumers can appreciate these moderate numbers.
• Gasoline prices fell 6.0% in November and are now down 8.9% year-over-year.
• Costs of used cars and trucks increased 1.6% but are down 3.8% over the year.
• Costs of new vehicles fell 0.1%.
• Apparel costs fell 1.3%.
• The medical care index rose 0.6% in November.
• Costs of motor vehicle insurance rose 1.1% for the month and are up a shocking 19.2% year-over-year. (Be prepared when you get your next bill.)

Overall, I’d say this November inflation report came in about on target, with shelter costs again being the “suspicious” factor pushing inflation higher. Over the next 12 months, this trend is likely to reverse. The trend over the last year has been gradually-moderating inflation, but with core locking in at 4.0% with shelter as the major factor:

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 on TIPS and set future interest rates for I Bonds. For November, the BLS set the inflation index at 307.051, a decrease of 0.20% from the October number.

Remember that non-adjusted inflation tends to lag the official number toward the end of the year because of holiday-season discounting. So this deflationary number wasn’t a surprise, and you can expect to see another one for December before things turn around in January.

For TIPS. The November inflation index means that principal balances for all TIPS will decline 0.20% in January, after falling 0.04% in December. Here are the new January Inflation Indexes for all TIPS.

For I Bonds. The November inflation report is the second of a six-month string that will set the I Bond’s new variable rate, to be reset on May 1. So far, with four months to go, inflation has fallen 0.24% for this period. It’s too early to make any judgement about the new variable rate. We saw a similar pattern in November to December in 2022, but then non-seasonally adjusted inflation leaped higher in January 2023.

Here are the numbers so far:

What this means for future interest rates

Although all-items inflation came in slightly higher than expectations in November, I don’t believe this will have any real effect on the Federal Reserve’s thinking on interest rates. The Fed is highly likely to continue, for now, to hold short-term interest rates in the current range of 5.25% to 5.50%.

In fact, I’d guess these current inflation numbers won’t play a deciding role in the Fed’s interest-rate decisions. More likely, the Fed will be watching employment trends. If the job market begins to sour, the Fed will begin lowering the federal funds rate.

From this morning’s Wall Street Journal report:

The Fed is on track to hold rates steady at its meeting Tuesday and Wednesday, and the latest inflation data won’t change that path. The latest reading is probably a bit firmer than the Fed would like to see to be confident that inflation is moving back quickly to its 2% goal, but it is unlikely to alter the Fed’s near-term policy stance because inflation has improved markedly this year.

Both the stock and bond markets seem confident that the Fed will begin easing next year, possibly by spring. That isn’t the message the Fed intends to send, but it could be true. The path forward, in my opinion, is going to be “choppy.”

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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.