One particular data point makes this 30-year TIPS auction look attractive

Posted on August 18, 2024 by Tipswatch

Markets remain overly optimistic about future inflation.

By David Enna, Tipswatch.com

The U.S. Treasury on Thursday will offer at auction $8 billion in a reopened 30-year Treasury Inflation-Protected Security, CUSIP 912810TY4. While most small-scale investors will shy away from this offering, one factor makes it interesting: a potentially low inflation breakeven rate.

The result will be a 29-year, 6-month TIPS. The coupon rate was set at 2.125% by the originating auction on Feb. 23, 2024, when investors in CUSIP 912810TY4 got a real yield to maturity of 2.20%, the highest in 14 years.

Since then, 30-year real yields have declined a bit. This TIPS trades on the secondary market, and on Friday it closed with a real yield to maturity of 2.06%, a bit below the coupon rate. It was trading at a premium price of 101.54.

Definition: The “real yield” of a TIPS is its yield above or below official future U.S. inflation, over the term of the TIPS. So a real yield of 2.06% means an investment in this TIPS will provide a return that exceeds U.S. inflation by 2.06% for 29 years, 6 months.

A 30-year Treasury of any kind is likely to be a highly volatile investment. Even small swings in market yields can send market value soaring up, or down. Here is the trend in the 30-year real yield over the last 4 1/2 years:

A 30-year real yield above 2.0% is attractive compared with trends over the last 14 years, and before that the Treasury did not offer 30-year TIPS from October 2001 to February 2010. In the late 1990s, auctioned 30-year real yields ran as high as 4.128%.

So … is 2.0%+ a “normal” or “attractive” 30-year real yield? I would say yes.

Inflation breakeven rate

The Treasury’s yield estimate for a 30-year nominal Treasury bond closed Friday at 4.15%. If you compare that to CUSIP 912810TY4’s real yield of 2.06%, you get a 30-year inflation breakeven rate of just 2.09%, a low number given current inflation trends. This means the TIPS will out-perform a nominal Treasury if inflation averages more than 2.09% over the next 29 years, 6 months.

Things will change before Thursday’s auction, but I’d say investors are underestimating future U.S. inflation. You could say, “But the Federal Reserve wants to keep inflation at 2.0%.” Sure, but that has been the Fed’s goal for more than a dozen years. Since that goal was set, annual inflation has been low (0.7% in 2015) and high ( 7.0% in 2021), but has averaged an annual rate of 2.6%.

Here is a chart showing 30-year average inflation rates going back to periods beginning in 1971. Not one 30-year period has had an inflation rate below 2.20.%

A low inflation breakeven rate does not guarantee that a TIPS will be a good long-term investment, but it does indicate it will likely out-perform a 30-year nominal Treasury.

We’ve seen very low 30-year breakeven rates at auctions in recent years, as low as 1.52% for a 30-year TIPS originating auction in February 2016. That particular TIPS has been a dud (it’s currently trading with a price of about 81.65). But with its auctioned real yield of 1.120% it is definitely out-performing a 30-year bond from February 2016, with a nominal yield of just 2.64%.

Here is the trend in the 30-year inflation breakeven rate over the last 4 1/2 years, showing the recent dip lower:

Pricing

CUSIP 912810TY4 closed Friday on the secondary market with a price of 101.54. You can track that in real time on Bloomberg’s U.S. Yields page. On the settlement date of Aug. 30 it will have an inflation index of 1.02367. So investors will be buying about 2.4% additional principal at a slightly premium price. Here is how a $10,000 par investment could look:

  • Par value purchase: $10,000
  • Actual principal purchased: $10,000 x 1.02367 = $10,236.70
  • Cost of investment: $10,236.70 x 1.0154 = $10,395.35
  • + Accrued interest: About $8.87

In summary, an investor purchasing $10,000 par value of this TIPS could pay about $10,395 for $10,237 in principal and then earn a coupon rate of 2.125% + inflation accruals over the next 29 years, 6 month. All of this will change by Thursday’s auction, but this provides a rough estimate.

Final thoughts

A low inflation breakeven rate doesn’t guarantee a top-notch TIPS investment. What a 30-year TIPS investor would like to see is: 1) a historically strong real yield to maturity, and 2) a historically low inflation breakeven rate. So this TIPS qualifies for anyone willing to venture into 30-year volatility.

I won’t be a buyer because the 30-year term falls outside my likely lifespan (I would be 100 years old in February 2054) and my style of TIPS investing is buy-and-hold to maturity. It could be a candidate for the top-end of a TIPS ladder for a younger investor. And because of its potential volatility TIPS traders may want to jump aboard.

I’d expect continued volatility in real yields in the days leading up to Thursday’s auction, so any investor should keep an eye on the Bloomberg U.S. Yields page. And of course this TIPS could be purchased at any time on the secondary market, if you see a yield you like.

This TIPS auction closes Thursday at 1 p.m. ET. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.

I plan on posting the results after the auction’s close. Meanwhile, here is a history of recent 29- to 30-year TIPS auctions. Notice that just three years ago the auctioned real yield was -0.292%, the lowest in history for this term:

—————————-

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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. Please stay on topic and avoid political tirades.

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.

Posted in Federal Reserve, Inflation, Investing in TIPS, TreasuryDirect | Tagged , , , | 20 Comments

U.S. annual inflation fell to 2.9% in July, lowest rate since March 2021

Posted on August 14, 2024 by Tipswatch

By David Enna, Tipswatch.com

The Federal Reserve got the sort of inflation report it desired for July, with the U.S. annual rate dipping below 3.0% for the first time since March 2021. There were no surprises, with annual core inflation dropping to 3.2% from 3.3% in June.

The Bureau of Labor Statistics reported seasonally adjusted inflation for July of 0.2%, which matched economist expectations. Core inflation, which eliminates food and energy, also ran at 0.2% for the month.

The BLS noted that shelter costs — a notorious inflation factor over the last 18 months — increased 0.4% for the month and 5.1% year over year. The BLS added this shocking fact: Shelter accounted for nearly 90% of the monthly increase in the all-items index. Other items from the report:

  • Gasoline prices were unchanged in June and down 2.2% over the last year.
  • The costs of food at home increased 0.1% for the month were up only 1.1% for the year.
  • Costs of motor vehicle insurance continued rising at a ridiculous pace, up 1.2% for the month and 18.6% year-over-year.
  • Airline fares fell 1.6% for the month and are down 2.8% for the year.
  • Costs of used cars and trucks fell 2.3% for the month and are down 10.9% for the year.
  • New vehicle prices also fell 0.2% and are now down 1.0% over the year.
  • Apparel costs fell 0.4% for the month.

Overall, most categories in this July report showed a declining trend for inflation, with the exception of shelter, which is considered a lagging indicator. But economists have been noting the lag factor for more than a year. It’s time to recognize that shelter costs are still rising, despite higher interest rates.

Here is the one-year trend for all-items and core inflation, with recent data showing steadily declining U.S. inflation:

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 July, the BLS set the inflation index at 314.540, an increase of 0.12% over the June number.

For TIPS. The July inflation number means that TIPS principal balances will increase 0.12% in September, after rising just 0.03% in July. Here are the new September Inflation Indexes for all TIPS.

For I Bonds. The July inflation report was the fourth in a six-month string that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset November 1. So far, with two months remaining, inflation has run at 0.71%, which would translate to a variable rate of 1.42%. Two months remain, and we could be looking at a new variable rate of around 2.2%, down from the current 2.96%.

See: Where is the I Bond’s composite rate heading in November?

Here are the data so far:

View historical data on my Inflation and I Bonds page.

What does this mean for the Social Security COLA?

The Social Security Administration uses a different inflation index — CPI-W — to determine the next year’s cost-of-living-adjustment. And it looks only at the average of three months of data, from July to September, compared with the average for the same three months of the previous year. For July 2024, the BLS set the CPI-W index at 308.501, an increase of 2.9% over the last year.

I have been projecting an increase of 2.7% but the July monthly increase in CPI-W was only 0.1%, versus my projection of 0.2%. Too early to make any judgement.

What this means for future interest rates

The Federal Reserve has been insisting it needs to see “additional data” before it begins a course of interest rate reductions. This July inflation report looks mild enough to kick the Fed into action. From today’s Wall Street Journal coverage:

The report likely seals the case for the Federal Reserve to begin cutting interest rates at its next meeting, Sept. 17-18. … On Wall Street, the debate recently has been not whether the Fed will cut rates soon, but how much it will cut, with some betting that the central bank will reduce rates by half-a-percentage point in September rather than the more typical quarter-of-a-percentage point.

From Bloomberg‘s coverage:

Inflation is still broadly on a downward trend as the economy slowly shifts into a lower gear. Combined with a softening job market, the Fed is widely expected to start lowering interest rates next month, while the size of the cut will likely be determined by more incoming data.

Despite the tricky politics of lowering interest rates just before a U.S. election, I think the Fed is on track for a September rate cut. That’s what the Fed has been signaling and that is what the stock and bond market are already pricing in.

But here is a somewhat contrary view from inflation-watcher Michael Ashton:

(T)here is nothing here that would encourage the Fed to aggressively ease 50bps. Or, for that matter, to ease at all. If the Fed eases in September (which I expect, even though if I were a member of the Board I wouldn’t vote for one), it will be because its members fear recession and not because there is evidence that inflation is licked. That evidence is still elusive.

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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.Please stay on topic and avoid political tirades.

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

Posted in Federal Reserve, I Bond, Inflation, Investing in TIPS, Retirement, Savings Bond, Social Security | Tagged , , , , | 11 Comments

Where is the I Bond’s composite rate heading in November?

Posted on August 7, 2024 by Tipswatch

By David Enna, Tipswatch.com

We are halfway through the I Bond’s interest-rate-setting period, with the next reset coming on Nov. 1 — or more probably on Halloween Day, Oct. 31. On that day, the U.S. Treasury will announce both a new fixed rate and inflation-adjusted variable rate for the U.S. Series I Savings Bond.

The I Bond’s current annualized composite rate is 4.28%.

The new fixed rate will apply to I Bonds purchased from November 2024 through April 2025. The fixed rate is crucial because it remains with the I Bond until it is redeemed or matures in 30 years.

The inflation-adjusted variable rate will apply to all I Bonds for six months, no matter when they were purchased. When combined with the fixed rate, it forms the I Bond’s composite rate. As things stand today:

  • I Bonds purchased through October 2024 have a fixed rate of 1.3%.
  • The current variable rate is 2.96%.
  • And that creates an annualized composite rate of 4.28% for six months.

Now the bad news …

It’s early to make a projection, but after looking at the numbers I would guess that both the I Bond’s fixed rate and variable rate will be falling at the November reset. A lot will depend, of course, on where real yields (which are currently falling) and non-seasonally-adjusted inflation (also falling) end up in the next three months.

The fixed rate

The Treasury has no announced formula for setting the I Bond’s fixed rate. TreasuryDirect provides only this cryptic information:

The Secretary of the Treasury, or the Secretary’s designee, determines the fixed rate. The rate is based on market rates that have been adjusted to account for the value of components unique to savings bonds. These include the early redemption put option, tax deferral feature, deferred purchase feature, and Treasury’s administrative costs.

After years of monitoring this fixed-rate decision, (and getting help from clever Bogleheads) I have settled on a formula for forecasting what the Treasury is likely to do. The idea is to look at average real yields of 5- and 10-year TIPS in the six months leading up to the rate decision, and then apply a ratio of 0.65 to those averages.

The formula recently has been accurate when applied to the average for 5-year TIPS, but I like to look at the 10-year TIPS as a backup.

Just before the Treasury’s last I Bond reset on May 1, real yields were at annual highs for 2024, hitting 2.29% for both the 5- and 10-year TIPS on April 30. For the next two months, real yields remained fairly elevated, holding above 2.0% through the beginning of July. But then the decline began, which has accelerated in recent days as the Federal Reserve moves closer to cutting short-term interest rates.

On Tuesday morning, both the 5-year and 10-year TIPS were trading with real yields of about 1.74%, down 55 basis points from the April 30 high.

Interesting thing … if you look at just the three months from May 1 to Aug. 5, the I Bond’s fixed-rate projection holds at the current level of 1.3%.

But … what if real yields continue at this 1.74% level (or lower) for the next three months? If that happens, the I Bond’s fixed rate is likely to fall to 1.2%, or lower.

Conclusion. My feeling is that we are likely to see lower real yields in the next few months, so I am going to assume that the I Bond’s fixed rate will be reset in November to a rate lower than the current 1.3%.

The variable rate

Inflation has been slowing in recent months, falling from an annual rate of 3.4% in April to 3.0% in June. (Inflation over the last six months ending in June was 2.4%, which is high for six months. But in the last three months it was up only 0.59%.) The slowdown can be seen in the three months of data we have so far for calculating the I Bond’s new variable rate:

So far, inflation from April to June would translate to a new variable rate of 1.18%, with three months remaining. Because of recent trends, I would guess inflation will average no higher than 0.20% a month for the last three months, and an even lower number seems likely.

Part of my reasoning is that inflation in August 2023 surged higher by 0.44% and then 0.25% in September 2023. I doubt we will see numbers that high this year, so keeping up with 2023 will be tough. Notice that inflation in June 2024 was up only 0.03%, compared to 0.32% in 2023. We could even see a month of deflation in July to September 2024.

Any way you look at it, the I Bond’s variable rate appears likely to fall from the current 2.96% at the November reset. Of course, inflation is full of surprises, so we can’t be sure.

Conclusion

At this point I’d guess that both the I Bond’s fixed rate and variable rate will be lower, creating a composite rate well below the current 4.28%, possibly somewhere around 3.0% to 3.6%.

What does this mean for I Bond investors?

The good news is that three months of high-ish real yields should hold the I Bond’s new fixed rate above 1.0%, even if real yields decline further. In my view, a fixed rate around 1.0% is attractive.

The bad news is that the potentially lower composite rate is going to scare off I Bond investors. It shouldn’t — because in the long term the high fixed rate is the goal.

By mid-2025 we could also see nominal T-bill rates falling to a range below 4.0%. If the I Bond’s fixed rate can hold at 1.0% or above, I would be a buyer in 2025, even with the lower composite rate. But I would also be likely to turn over some remaining I Bonds with very low fixed rates. Those could end up with a six-month composite rate around 2.0% to 2.4%.

Of course, I could be totally wrong. Nothing is certain. The good thing is that this is a very early, mid-term look at potential I Bond interest rates. So the real answer is to sit back and wait to see how things develop.

What do you think? Post your ideas in the comments section.

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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.Please stay on topic and avoid political tirades.

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.

Posted in Cash alternatives, I Bond, Inflation, Investing in TIPS, Savings Bond, Treasury Bills, TreasuryDirect | Tagged , , , | 33 Comments

Let’s look at the two TIPS maturing in January 2025

Posted on August 4, 2024 by Tipswatch

Are they a steal? Not really.

By David Enna, Tipswatch.com

Recently, I have been getting questions and comments about the two Treasury Inflation-Protected Securities maturing on January 15, 2025. These are quoted on the secondary market as having eye-popping real yields close to 5%.

For example, here is a comment from July 31:

A nominal note (91282CDS7) maturing on January 15 has a YTM of 5.041. The TIPS (912828H45) has a YTM of 5.038. Does that mean if inflation is 0.003% or higher the TIPS will be the better investment? It looks like a steal to me. Am I missing something? Isn’t CPI over 2%? Is the seasonal adjustment going to be -2%?

This issue comes up every year for the TIPS maturing in January because of two oddities of TIPS: 1) After July 15, a TIPS maturing in January has only one coupon payment remaining, and 2) The principal balances for these TIPS are highly likely to get hit by a deflationary month (or two) before maturing. That is likely because TIPS accruals are based on non-seasonally adjusted inflation, which always runs lower than seasonal CPI toward the end of the year.

In 2023, for example, non-seasonal inflation was -0.04% in October and -0.20% in November. Since 2012, October non-seasonal inflation has been negative in 6 of the 12 years. November inflation has been negative 10 of the 12 years.

By market logic, the ending nominal yield for a TIPS purchased today and maturing in January should be close to a T-bill purchased today and maturing in January. Except that with the TIPS, there is a risk of under-performance that is not a factor for the basically riskless T-bill.

For example, last year I made an experimental purchase of CUSIP 912828B25 – maturing in January 2024 – to see how its real yield of about 4.0% would compare with a nominal T-bill of the same term. In that case, the TIPS ended up being the winner versus the T-bill, with an annualized nominal return of 6.2% vs. 5.5% But that won’t always be the case. Some things to consider:

The coupon rate is diminished as a factor.

Both CUSIP 912828H45 and 912810FR4 have only one coupon payment remaining, to be paid on Jan. 15 on the ending principal balance. For H45, the last payment will be 0.125%. For FR4, it will be 1.1875%. It is important to realize that once you purchase a TIPS, your return at maturity will be par value x final inflation index + final coupon payment.

Notice that even though the two TIPS have a wide variance in coupon rate, the current ask price is now quite close — 97.94 vs 98.93. That gap will continue to narrow as we approach Jan. 15, 2025.

The discounted price is key to your return.

If you buy a TIPS with a price of 97.94, you are getting a discount of 2.06%. At maturity, the price will be 100 — par value. If you annualize 2.06% from 5.5 months to a year, you get a nominal return of about 4.55%. The discount, not the coupon rate or upcoming inflation, is the major factor determining your eventual return.

In essence, purchasing a very short-term TIPS is much like purchasing a zer0-coupon bond (or a T-bill, which is originated at a discounted price.)

These TIPS have high inflation accruals.

H45 currently has an inflation index of 1.32602, meaning an investor will be purchasing 32.6% additional principal above par value. FR4 was originally issued on July 15, 2004, as a 20 1/2-year TIPS, so its inflation index is much higher — currently 1.66620. So in this case an investor will be purchase 66.6% additional principal above par value.

Purchasing a very short-term TIPS with a high inflation accrual creates some risk, because only par value is guaranteed to be returned at maturity. That is especially true for a TIPS maturing in January or April, because these TIPS are likely to get hit by a deflationary month near the end of their terms.

A potential scenario

Both of these TIPS already have an inflation index set through August 31, based on June’s meager non-seasonally adjusted inflation of 0.03%. And then …

  • July inflation will set September inflation accruals.
  • August inflation will set October inflation accruals.
  • September inflation will set November inflation accruals.
  • October inflation will set December inflation accruals.
  • November inflation will set inflation accruals through January 15.

I have no idea of where inflation is heading through November 2024, but I do feel confident there could be one or two deflationary months in that mix. And that, I believe, is also what the market is expecting.

In this scenario, I am reflecting market expectations, which appear to be for fairly low non-seasonally adjusted inflation through the end of 2024. Here is how a $10,000 par purchase for these two TIPS works out, using these conservative estimates:

This is an estimate of potential return, not meant to be exact.

One qualification on the annualized yields: Almost all of the yield advantage for the two TIPS comes from the fact they have a 5.5-month term versus 6 months for the T-bill. In other words, the dollar returns would be similar, but the TIPS get there quicker.

In the end — under this inflation scenario — both TIPS would out-perform a 6-month T-bill. If inflation runs higher, each TIPS will do better. If harsher deflation sets in, the TIPS will under-perform. The TIPS investment involves some risk, while the T-bill is essentially riskless. For that reason, it is logical that the TIPS would provide the higher potential yield.

Conclusion. Unless you expect inflation to surge higher at the end of this year, the T-bill still looks like the more sensible, much-less-complex investment. That’s my opinion.

—————————-

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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.Please stay on topic and avoid political tirades.

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.

Posted in Inflation, Investing in TIPS, Treasury Bills | Tagged , , , , | 7 Comments

Projection: Social Security COLA for 2025 should be around 2.7%

Posted on July 28, 2024 by Tipswatch

By David Enna, Tipswatch.com

The recent release of the June 2024 inflation report created a baseline number for next year’s cost of living adjustment for Social Security recipients. It’s all based on a needlessly complex formula the Social Security Administration uses to set the COLA each year.

  • The index. The SSA does not use the standard measure of inflation that you see reported each month. Instead it uses CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, which often runs slightly lower than the standard CPI-U.
  • The time period. Instead of using an annual rate of inflation, the SSA looks at only the average of three months, July to September, and compares that to the average from a year earlier. Last year, for example, the three-month average was 301.236, an increase of 3.2% over the average for 2023. So the 2024 COLA was set at 3.2%, even though annual U.S. inflation was running at 3.7%.
  • The summer months. Inflation can be notoriously volatile in the months of July to September. We could easily see a month of high-ish inflation, or an another month of deflation, as we saw in June. That means any Social Security COLA projection — including mine — is just an educated guess.

For June, the BLS set the CPI-W index at 308.054, an increase of 2.9% over the last year. So does that mean the Social Security COLA will end up being 2.9%? No, because only the next three months — July to September — matter in this equation.

In this chart, I have provided four potential monthly inflation scenarios for the July to September period — 0.0% per month to 0.3% per month — and then calculated the effect on the eventual Social Security COLA.

Most likely, none of these scenarios will end up being accurate. Anything can happen, including a bout of deflation. But I think the scenario with the highest probability is inflation averaging 0.2% a month over the three months, resulting in a Social Security COLA of 2.7%.

So my projection is 2.7%. That is a drop from 2024’s increase of 3.2% and is below the current rate of U.S. inflation, at 3.0% for the year ending in June.

As of May 2024, the average Social Security benefit check was $1,778.24, according to the SSA. An increase of 2.7% would raise the average to $1,826.25.

What others are saying

I wrote everything above before looking at any other projections for the Social Security COLA. In my experience, many of these forecasts are wildly off base.

One group I trust is the Senior Citizens League, which crunches a lot of data in developing its forecast. The group is projecting a COLA increase of 2.63% for 2025, which would effectively round to 2.6%.

I’ve seen other projections as high as 3.0%, which could happen but seem unlikely.

SSA COLA versus CPI

In general, the combination of using CPI-W and the smoothing effect of a three-month average results in the Social Security COLA being lower than annual CPI. The Senior Citizens League has lobbied for years to replace CPI-W with CPI-E, and index that more accurately reflects costs faced by older Americans.

For 2024 the COLA was 3.2% even though CPI-U increased 3.7% over the September 2022 to September 2023 period. In some years, however, the COLA has outpaced official inflation. That doesn’t look likely for 2025.

Also read: Does The Social Security COLA Shortchange Seniors?

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Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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.Please stay on topic and avoid political tirades.

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.

Posted in Inflation, Medicare, Retirement, Social Security | 25 Comments