Plus, what’s ahead for investors in TIPS and I Bonds?

By David Enna, Tipswatch.com

U.S. all-items inflation rose 0.4% on a seasonally adjusted basis in August, up from 0.1% in July. The annual rate held at 3.4%, matching expectations, the BLS reported today.

Core inflation, which strips out food and energy, increased 0.3% for the month, higher than expectations. Annual core inflation came in at 2.4%, falling from 2.5% in July and matching expectations. None of this looks like market-shaking news, except that U.S. inflation remains too high, especially for U.S. consumers who drive cars, travel by plane, and need a place to live.

The price index for gasoline rose 3.9% in August, accounting for more than one third of the monthly all-items increase, the BLS said. Gas prices are up 27.4% over the last year. More troubling is the price of fuel oil, up 10.1% for the month and 52% for the year. Also in the report:

• Shelter costs rose 0.3% in August, after rising only 0.1% in each of the prior two months. These costs are up 3% year over year.
• Food at home prices were flat for the month and up 2.2% for the year.
• Costs of apparel were flat for the month but up 3.6% for the year.
• New vehicle costs rose 0.3% for the month, but only 0.6% for the year.
• Used vehicle costs rose 0.4% in August but are down 2.3% for the year.
• Airline fares rose 2.2% for the month and 23.4% for the year.
• Costs of motor vehicle insurance fell 0.3% for the month and are down 5.1% for the year.

A key takeaway is that energy and shelter were strong elements in the rise in August inflation. Food prices remain a moderating force. Here is the trend in all-items and core inflation over the last 12 months, showing the obvious effects of the war with Iran, which began in late February:

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances of TIPS and set future interest rates for I Bonds. For August, the BLS set the CPI-U inflation index at 334.980, an increase of 0.32% over the July number.

For TIPS. The August number means that principal balances for all TIPS will increase 0.32% in October, after falling 0.01% in September. For the year ending in October, principal balances will have increased 3.4%. Here are the new October Inflation Indexes for all TIPS.

For I Bonds. August marks the fifth month of a six-month string that will determine the I Bond’s next inflation-adjusted variable rate, to be reset November 1 based on inflation from April to September 2026. After five months, inflation has increased 1.44%, which translates to a variable rate of 2.88%. One month remains and it looks likely the variable rate will end up around 3.4% to 3.5%, higher than the current 3.34%. Here are the data:

Also, it continues to look likely that the I Bond’s fixed rate will rise to 1.30% at the November reset, up from the current 0.90%. I’ll be writing about that next month.

The Social Security COLA

The Social Security cost-of-living adjustment is based on an unusual inflation index – CPI-W – and is determined by averaging the indexes for July, August, and September and comparing that number to the same average for the year before. For August, the BLS set the CPI-W index at 328.481, up 0.4% from July.

The key is to compare the third-quarter averages — 2026 versus 2025, currently showing an increase of 3.3%. My projection was for an increase of 3.6%, which might have been too high. But we might still get there.

What this means for future interest rates

A week ago Federal Reserve Governor Christopher Waller moved markets by saying he was inclined to support holding interest rates steady at next week’s Fed meeting, but the decision would depend on the August inflation report.

So we’ve seen the report: What do we think? The numbers mostly matched expectations, except that monthly core was a tick high at 0.3%. Annual core fell a notch to 2.4%. Some of that price moderation could be caused by the effects of higher gas prices, which deplete other consumer spending.

This morning’s Bloomberg headline says: “Hotter Core CPI Adds Pressure for Fed to Hike Rates.” I think I prefer the Wall Street Journal headline: “Firm Inflation Reading Pushes Fed Closer to Rate Increase.” This wasn’t a blazing hot inflation report, but it did indicate that even core inflation, minus the effect of gas prices, isn’t waning. From Bloomberg:

Economists said the report adds to the case for the Fed to raise interest rates on Sept. 16. Initial calculations suggested that the proportion of categories showing elevated increases – a metric that Chairman Kevin Warsh has put a spotlight on – failed failed to retreat in the month. …

The Fed prefers the PCE inflation gauge. So Citigroup economists calculate that after today’s CPI and yesterday’s PPI, the core PCE for August is tracking a 0.29% month-on-month increase. That would be a three-month high for that rate. Too hot to be consistent with the Fed’s 2% inflation annual inflation target. …

Looking ahead, there’s more inflationary pressure in the pipeline. The average retail price of diesel fuel just topped $6 a gallon, according to this morning’s AAA report.

The Fed is powerless to have much of an effect on energy prices, which have shot higher because of the effects of the war with Iran. But as a symbolic move, both to the markets and the White House, a 25-basis point increase seems appropriate next week. That would back up Fed Chairman Kevin Warsh’s recent hawkish statements.

Plus, if Warsh decides to favor holding rates steady, he could face major dissent on the Fed’s Open Market Committee. It would be better to look unified. I’d say a rate increase is coming.

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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.