By David Enna, Tipswatch.com
U.S. inflation surged 0.6% in March, the Bureau of Labor Statistics reported today, and provided the final piece of data to determine the new variable rate for U.S. Series I Savings Bonds: a whopping 3.54%, annualized, for purchases after April 30 and eventually for all I Bonds.
The I Bond’s new variable rate is based on a six-month inflation rate, in this case from September 2020 to March 2021. Non-seasonally adjusted inflation increased 1.77% over that period, which translates to a new six-month variable rate of 3.54%, annualized, for all I Bonds. That is a huge increase over the current rate of 1.68%.
In today’s report, the BLS set the March inflation index at 264.877, an increase of 0.71% over the February number. It’s been a strange six months, with non-seasonally adjusted inflation rising only 0.06% in the first three months, then surging 1.69% in the last three months.
Here are the relevant numbers (you can see historical data on this page, which I update monthly):
What this means
Obviously, we are going to see intense investor interest in I Bonds over the next few months, with the new composite interest rate — combined with a 0.0% fixed rate — likely to be 3.54% (annualized) for six months. That is the highest rate reset since May 2011, when the inflation-adjusted variable rate surged to 4.6%.
For current I Bonds. If you already bought your I Bond allocation in 2021 (as I did in January), you will be earning 1.68% for six months and then 3.54% for six months, for a one-year rate of 2.61%, triple the current earnings of any other very safe one-year investment.
Investments in I Bonds are limited to $10,000 per person per calendar year, along with the possibility of purchasing $5,000 in paper I Bonds in lieu of a federal income tax refund.
All I Bonds, no matter when they were purchased, will get the 3.54% variable rate for six months. When that rate kicks in depends on the month you purchased the I Bond. Remember, when you purchase an I Bond, you always get the current composite rate for six months, before the next reset takes effect. Here is that schedule:
|Issue month of your bond||New rates take effect|
|January||January 1 / July 1|
|February||February 1 / August 1|
|March||March 1 / September 1|
|April||April 1 / October 1|
|May||May 1 / November 1|
|June||June 1 / December 1|
|July||July 1 / January 1|
|August||August 1 / February 1|
|September||September 1 / March 1|
|October||October 1 / April 1|
|November||November 1 / May 1|
|December||December 1 / June 1|
Purchases after May 1. If you wait until May 1 to purchase I Bonds, you can be assured of earning 3.54% for six months, and then a-yet-to-be determined rate for six months. But the worst you could do is 1.77% over the year, even if the next variable rate resets to 0.0%.
I suspect a lot of investors who haven’t yet purchased I Bonds in 2021 will now wait until after May 1, locking in that higher variable rate for the first six months.
Let’s remember the reason we invested in I Bonds: To protect against unexpectedly high inflation. In March 2021, we got exactly that. I will be writing more on this topic in a few days after I let today’s news settle in.
The March inflation report
The Consumer Price Index for All Urban Consumers increased 0.6% in March on a seasonally adjusted basis, the BLS reported. This 1-month increase was the largest rise since a 0.6% increase in August 2012. Over the last 12 months, the all-items index increased 2.6%.
Economists were expecting higher inflation in March, based on very weak numbers in pandemic-stricken March 2020. But actual inflation for the all-items index was higher than the consensus, for both the month and year-over year.
Core inflation, which removes food and energy, came in at 0.3% for the month, also higher than the consensus estimate. The year-over-year number for core inflation matched the target of 1.6%.
The BLS noted that higher gasoline prices again were a key factor in March’s inflation increase, rising 9.1% for the month and accounting for nearly half of the seasonally adjusted increase in the all-items index. Other items of interest:
- Food prices increased a moderate 0.1% in the month, but are up 3.5% over the last year.
- The costs of shelter increased 0.3%, but are up only 1.7% over the year. (Rents have been held down by eviction moratoriums and other measures, which may end soon.)
- Prices for used cars and trucks increased 0.5% and are up 9.4% over the year.
- Apparel prices fell 0.3% and are down 2.5% over the year.
- The motor vehicle insurance index increased for the third consecutive month, rising 3.3 percent in March.
- The index for medical care services rose 0.1% for the month and is up 2.7% for the year.
Here is the overall trend for both all-items and core inflation over the last year, showing the dramatic rise in all-items inflation (primarily caused by rising gas prices) and the relatively stable path for core inflation:
What this means for TIPS
As with I Bonds, non-seasonally adjusted inflation is the key number for Treasury Inflation-Protected Securities, setting future adjustments of principal balances for TIPS. March’s increase of 0.71% in non-seasonally adjusted inflation means that principal balances for all TIPS will rise 0.71% in May, following a 0.55% increase in March.
Here are the new May Inflation Indexes for all TIPS.
What this means for future interest rates
The Federal Reserve certainly saw this coming: U.S. inflation was going to surge in the spring of 2021 when compared to the very weak numbers of spring 2020, when much of the economy was shut down. I don’t think today’s report alone will have any effect on the Fed’s policy. It will need to see many months of surging inflation to change course.
So for now, expect the Fed to continue holding short-term interest rates near zero, and to continue its current program of bond-buying, with any tapering or increases that could jolt the market.
* * *
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.