U.S. inflation rose 0.3% in April, again exceeding expectations

While annual inflation dipped slightly, inflation continues to run hot — too hot for complacency by the Federal Reserve.

By David Enna, Tipswatch.com

When is a surprise not a surprise? When it comes to economists trying to predict U.S. inflation.

All-items U.S. inflation rose 0.3% in April, exceeding economist predictions of 0.2% for the month and continuing a string of monthly upside surprises. The year-over-year number was 8.3%, also exceeding expectations of 8.1%. Core inflation looked even worse, coming in at 0.6% for the month (beating expectations of 0.4%) and 6.2% for the year (versus 6.0%).

The stock market’s instant reaction was negative. Just minutes before the Bureau of Labor Statistics released the report at 8:30 a.m., S&P 500 stock market futures were trading at 3996. Minutes after the report, futures were down to 3969.

In April, U.S. inflation rose 0.3% even though the price of gasoline — a major factor in the monthly all-items report — actually declined 6.1%, but remained 43.6% higher year over year. Already, this trend has reversed, with gas prices rising to record highs in May.

The BLS noted that increases in the indexes for shelter, food, airline fares, and new vehicles were the largest contributors to the seasonally adjusted all-items increase. Some highlights:

  • The food at home index rose 1.0% in April, the fourth month in a row with price increases higher than 1%. Year over year, food at home prices were up a painful 10.8%.
  • Food prices have increased 17 months in a row. The BLS noted that the index for dairy and related products rose 2.5%, its largest monthly increase since July 2007. The index for eggs increased 10.3% in April.
  • Shelter costs increased 0.5% for the month and are now up 5.1% year over year. Shelter costs are a lagging indicator and should be a factor in higher inflation in coming months.
  • The cost of used cars and trucks fell 0.4% in April, but are still 22.7% higher year over year. The index for new vehicles was up 1.1% for the month.
  • Apparel prices also fell 0.8% in the month.
  • The index for airline fares increased a mammoth 18.6% in April, the largest one-month increase since the inception of the CPI-U series in 1963.
  • Costs of medical care increased 0.5% in April and are up 3.5% year over year.

Here is the trend in all-items and core inflation over the last year, showing that annual inflation did peak in March, but remained at a very high level in April:

Source: Bureau of Labor Statistics

A side note: The separate inflation index — CPI-W — used to determine Social Security’s annual cost of living increase has increased 8.9% over the last 12 months, a bit higher than overall U.S. inflation. But the Social Security increase for 2023 will be determined by the average of inflation from July to September. It’s too early to draw any conclusions.

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 for TIPS and set future interest rates for I Bonds. For April, the BLS set the inflation index at 289.109, an increase of 0.56% over the March number.

Keep in mind that since non-seasonally adjusted inflation was running higher than the seasonally adjusted number in April, this will eventually reverse in coming months. The two numbers merge after 12 months.

For TIPS. The April inflation number means that principal balances for all TIPS will rise 0.56% in June, after rising 0.91% in April and 1.34% in May. Here are the new June Inflation Indexes for all TIPS.

For I Bonds. The April inflation index is the first of a six-months string — from April to September — that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset on November 1. So far, that 0.56% number would translate to a variable rate of 1.12%, but it’s way too early to draw any conclusions from just one month. Inflation can be highly volatile in summer months.

Here are the data I’m tracking:

What this means for future interest rates

While annual inflation slipped slightly lower in April, the upside surprises for both all-items and core inflation indicate that the Federal Reserve has to stay the course with balance-sheet reductions and routine increases of 50 basis points in short-term interest rates.

I think the bond market has already priced in this trend, with the 5-year nominal Treasury rising above 3% earlier this week. The real yield of a 5-year TIPS is inching ever closer to zero and should quickly rise to positive, if the Fed stays the course and attempts to hold down inflation expectations.

I don’t expect annual U.S. inflation to continue above 8% for long. It should begin gradually slipping lower in coming months, possibly ending the year in the 4% to 5% range. This is what the market expects, but a lot will depend on if the U.S. economy can remain reasonably strong at a time of soaring energy prices and rising interest rates.

Next week’s reopening auction of a 10-year TIPS should be interesting. That TIPS is currently trading on the secondary market with a real yield of 0.32% and a price discounted to par. We haven’t seen that in a long time. I will be writing a preview article on that auction this weekend.

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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.

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.

Posted in I Bond, Inflation, Investing in TIPS | 6 Comments

Ready to convert paper I Bonds into electronic form? Here’s a step-by-step guide.

Hint: It’s a bit complicated. What else would you expect?

Editor’s note: In October 2021, Wisconsin-based financial adviser Jeremy Keil invited me onto his podcast to talk about I Bonds. He was ahead of the curve on I Bonds, educating himself on a topic that would be of great benefit to his clients. Later on, he mentioned to me that he was going to get paper I Bonds in lieu of a federal tax refund, and then convert them to electronic I Bonds at TreasuryDirect. I asked him if he’d write a step-by-step description of the entire process, and here it is …

By Jeremy Keil, CFP®, CFA

Jeremy Keil

With purchases of US Series I Savings Bonds (I Bonds) exploding over the past year and a cap of $10,000 per person in electronic savings bonds, many people are trying to go past that cap by using their tax refund to buy up to $5,000 more.

They may be surprised to see these $5,000 savings bonds come in paper form and are curious how to convert them over to electronic form.

I went through the process of getting paper savings bonds from my tax return and converted them into my online Treasury Direct account so I could live to tell the tale and give you a step-by-step guide on how to do it.

How to get US Series I Savings Bonds from your tax return

If you are intentionally trying to get I Bonds from your tax refund you’ll likely want to overpay, on purpose, estimated taxes into the IRS, probably closer to the end of the year.

Make sure you are aware of:

Alert your tax preparer to your desire to receive part of your refund in paper savings bonds. Chances are you have already maxed out the Treasury’s $10,000 per person/entity per calendar year limit for I Bonds. With the added steps to get paper savings bonds, you likely want the $5,000 per return max if you’re going through this exercise.

After you file your return wait a few weeks (or months!) and you’ll get a series of envelopes in the mail from “Treasury Retail Securities.”

I was quite surprised to get a stack of multiple envelopes.

When I opened the first one it was for $50, and I thought “if they sent me 100 – $50 US Savings Bonds that’s crazy!” but it turned out they sent me 12 total bonds. 4 – $1,000; 1 – $500; 1 – $200; 6 – $50.

Then came the next step:

How to convert paper savings bonds into electronic form

Treasury Direct has a page that gives you some instructions, but below are the steps (with pictures) I took to convert my paper saving bonds into electronic form.

I’ll emphasize it again, but do NOT sign the back of your savings bonds at any time during this process.

I’m assuming you already have a Treasury Direct account. If not go here for instructions on how to open the account.

  1. Log in to TreasuryDirect.

2. Click on Manage Direct, one of the middle blue menu buttons at the top of the page.

3. Click on Establish a Conversion Linked Account

4. Next, click Create Account

5. You will then be in your “Conversion Account” – Click on Manage Direct again, in the blue box at the top of the page.

6. Under Manage My Conversions, click on “Convert my bonds.”

7. Select the Registration you are converting for (likely your own) and continue

8. Then start adding in paper savings bonds to your cart

9. Once you have added all your paper bonds, click view cart, and once you are ready, click Create a Manifest

10. You will now have a paper manifest you can use to print and mail in with your paper savings bonds. Do NOT sign the back of your savings bonds!

11. The manifest will give you a P.O. box and a physical mailing address. You will sign your manifest. Do NOT sign the back of your savings bonds!

I suggest using some sort of tracking system through USPS, UPS, or FedEx so that you can know when your savings bonds arrive, which means you’d likely mail it to the physical address, not the P.O. box.

I also suggest keeping a copy of your manifest, and making a copy of the savings bonds you send in.

12. Double check through the mail tracking system you used that the bonds arrived, and then wait a few weeks and you’ll see your paper bonds are now listed in your conversion account.

What comes next?

It’s an odd system, but you’ll essentially have two accounts through Treasury Direct that are accessed through your main account login.

The first is your regular login that will list out your current securities total, and your current holdings.

The second is listed towards the bottom of the page, and you’ll have to click on My Converted Bonds to get into and transact on that part of your account.

Now that you know how to link your paper savings bonds into your online TreasuryDirect account, please spread the word – especially to people like your parents who probably have old paper savings bonds.

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Jeremy Keil, CFP®, CFA is a retirement focused financial planner with Keil Financial Partners. If you have retirement, investment or tax planning questions Jeremy’s team can get you started in the right direction.

Jeremy also hosts the Retirement Revealed blog and podcast where you will learn more about your money, feel better about your money and make better money decisions.

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.

Posted in I Bond, Savings Bond | 12 Comments

Podcast: ‘Inflation Guy’ questions the Fed’s resolve to fight soaring prices

“The recession isn’t going to happen tomorrow, but it will happen next year.”

Tipswatch.com

As we all expected, the Federal Reserve raised its key short-term interest rate by 50 basis points on Wednesday, while also announcing plans to begin paring back its balance sheet in June. And then .. the stock market roared about 3% higher on the news. Federal Reserve Chairman Jerome Powell triggered the surge with these words at his afternoon press conference:

So a 75-basis-point increase is not something the committee is actively considering. … there’s a broad sense on the committee that additional 50-basis increases should be on—50-basis-point increases should be on the table for the next couple of meetings.

It was a brilliant move by the Fed, in my opinion. Brilliant in the sense of setting up expectations in recent weeks — a 75 basis point increases was “possible” — and then knocking down that idea, making multiple increases of 50 basis points seem appealing. The stock market, which has been slumping for weeks, celebrated with a one-day party.

That’s how I saw it. Now let’s hear from Michael Ashton, an inflation guru who explains his thoughts just about weekly in his “Cents and Sensibility” podcast. In this episode, titled “Reflections on this Century’s First 50bp Rate Hike,” Ashton points out that the Fed did what was expected, and there is no danger in doing what is expected.

But he also warns about complacency on the U.S. economy, which could be heading toward a difficult stretch, even with inflation continuing in a 4% to 5% range next year:

I can’t think of any examples in history where you had a large increase in energy prices, not to mention food prices, and large increases in interest rates … and didn’t have a recession. That would be very odd. … The recession isn’t going to happen tomorrow, but it will happen next year.

And this forecast raises the “big” question: Will the Fed have the nerve to continue fighting inflation even when stocks fall into a bear market and the economy is suffering? Ashton contends that the “Fed put” — its resolve to protect the stock market — remains alive, even it it is in hiding.

Here is his podcast intro:

Today the Federal Reserve raised the overnight Fed Funds rate 50bps – the largest such increase since May 2000 (and the Inflation Guy is sticking by the title of this episode since technically the 20th century didn’t end until 12/31/2000!), and Chairman Powell strode confidently to the microphone in the post-meeting presser. How does this action, and what Powell said, impact the inflation outlook and why did the markets behave the way they did? (The answers are: not much, and for unhealthy reasons, but listen to the podcast anyway.)

Who is Michael Ashton?

His audiences know him as the “Inflation Guy.” He is a pioneer in the U.S. inflation derivatives market. Before founding his company, Enduring Investments, Ashton worked in research, sales and trading for several large investment banks including Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003, when he traded the first interbank U.S. CPI swaps, and 2004 when he was the lead market maker for the CME’s CPI Futures contract, he has played an integral role in developing new instruments and methods for accessing and hedging various inflation exposures. In 2016, Mr. Ashton published What’s Wrong With Money? The Biggest Bubble of All. He is a graduate of Trinity University and lives in Morristown, New Jersey.

Have a question? Get the Inflation Guy app in the Apple App Store or Google Play, or email InflationGuy@enduringinvestments.com.

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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.

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.

Posted in Inflation | 13 Comments

Treasury holds I Bond’s fixed rate at 0.0%; composite rate rises to 9.62% for six months

By David Enna, Tipswatch.com

EE Bonds will have a fixed rate of 0.1%, but continue doubling in value after 20 years, creating an effective interest rate of 3.5%

The U.S. Treasury just announced the May to October 2022 terms for U.S. Series I Savings Bonds and EE Bonds, and there were no surprises. I Bonds remain exceptionally attractive; they will pay an annualized composite rate of at least 9.62% for six months, for all I Bonds, no matter when they were issued.

I Bonds

Here are details from the Treasury’s announcement:

The composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate. The 9.62% composite rate for I bonds bought from May 2022 through October 2022 applies for the first six months after the issue date. The composite rate combines a 0.00% fixed rate of return with the 9.62% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 274.310 in September 2021 to 287.504 in March 2022, a six-month change of 4.81%.

And here is my translation:

  • An I Bond earns interest based on combining a fixed rate and a semi-annual inflation rate. The fixed rate – which will continue at 0.0% – will never change. So I Bonds purchased from May 2, 2022, to October 31, 2022, will carry a fixed rate of 0.0% through the 30-year potential life of the bond.
  • The inflation-adjusted rate (also called the variable rate) changes every six months to reflect the running rate of non-seasonally adjusted inflation. That rate is now set at 9.62% annualized. It will update again on November 1, 2022, based on U.S. inflation from March to September 2022.
  • The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 7.12% but now rises to 9.62%, the highest in history for I Bonds. An I Bond bought today will earn 9.62% (annualized) for six months and then get a new composite rate every six months for its 30-year term.

It’s important to note, however, that all I Bonds — no matter when they were issued — will get that 9.62% inflation-adjusted rate for six months, on top of any existing fixed rate. So an I Bond purchased in April will receive 7.12% for six months, and then 9.62% for six months. I Bonds purchased back in September 1998 (with a fixed rate of 3.4%), will receive a composite rate of 13.18% for six months.

Here is the formula the Treasury used to determine the I Bond’s new composite rate:

The composite rate for I bonds issued from May 2022 through October 2022 is 9.62%
Here’s how the Treasury set that composite rate:
Fixed rate0.00%
Semiannual inflation rate4.81%
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)][0.0000 + (2 x 0.0481) + (0.0000 x 0.0481)]
Composite rate  [0.0000 + 0.0962 + 0.0000000]
Composite rate0.0962000
Composite rate0.09620
Composite rate  9.62%
Source: TreasuryDirect.com

Obviously, I Bonds remain a very attractive investment. I had been urging investors to buy in April to catch that 7.12% rate for six months, and then the 9.62% rate for six months. But if you missed that deadline — and I’ve heard from many of you that this happened — don’t worry. Just purchase I Bonds in May and get that 9.62% rate for six months, followed by another variable rate (probably fairly high) in six months.

An I Bond has to be held one year before it can be redeemed, but an investor can purchase the I Bond near the end of a month and get full credit for the month. That means an I Bond can be, effectively, an 11-month investment. I Bonds redeemed from 1 to 5 years face a penalty of three months interest; after 5 years there is no penalty.

If you are looking at an I Bond as a short-term investment, buying late in May 2022 and redeeming in early May 2023 guarantees you a return of 4.81%, even after the three-month interest penalty, which will be applied to the next variable rate. Your return will probably be much higher.

However, I advise using I Bonds as a long-term investment, building up a large store of inflation-protected cash. I’d absolutely advise against selling any I Bonds until the 9.62% rate is complete. The month that it triggers depends on the month that you originally bought the I Bond.

Issue month of your bondNew rates take effect
JanuaryJanuary 1 and July 1
FebruaryFebruary 1 and August 1
MarchMarch 1 and September 1
AprilApril 1 and October 1
MayMay 1 and November 1
JuneJune 1 and December 1
JulyJuly 1 and January 1
AugustAugust 1 and February 1
SeptemberSeptember 1 and March 1
OctoberOctober 1 and April 1
NovemberNovember 1 and May 1
DecemberDecember 1 and June 1

The fixed rate of an I Bond is equivalent to the “real yield” of a Treasury Inflation-Protected Security. It tells you how much the I Bond will yield above the official U.S. inflation rate. Right now, an I Bond will exactly match U.S. inflation. Because the Treasury held the I Bond’s fixed rate at 0.0%, it will track official U.S. inflation, but not exceed it, except after a period of extended deflation.

I Bonds carry a purchase limit of $10,000 per person per year, and must be purchased electronically at TreasuryDirect. Investors also have the option of receiving up to $5,000 in paper I Bonds in lieu of a federal tax refund. Learn more about I Bonds in the I Bonds Manifesto and in my Q&A on I Bonds.

EE Bonds

Here are the Treasury’s terms announced Monday:

Series EE bonds issued from May 2022 through October 2022 earn today’s announced rate of 0.10%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price. The bonds will continue to earn interest at their original fixed rate for an additional 10 years unless new terms and conditions are announced before the final 10-year period begins.

And here is my translation:

  • The EE Bonds’ fixed rate remains at 0.1%, where it has been since November 2015. Awful, right? (Check out your current money market savings rate, somewhere around 0.05%, or less.) But the EE Bonds’ fixed rate is irrelevant because…
  • An EE Bond held for 20 years immediately doubles in value, creating an investment with a compounded return of 3.5%, tax-deferred. So, if you invest $10,000 at age 40, you can collect $20,000 at age 60, with $10,000 of that total becoming taxable.
  • After the doubling in value at 20 years, the EE Bond reverts to earning 0.1% for another 10 years.

Retaining this 20-year doubling is a big deal. The Treasury has changed this holding period several times in the past, so there was a possibility the terms could change in 2022, with the 20-year nominal Treasury currently yielding 3.14%, still below the EE Bond’s potential of 3.5%.

But as interest rates have climbed this year, the appeal of EE Bonds is lessening. It’s possible you will be able to get 3.5% in 5-year CDs in the future. The 5-year nominal Treasury is yielding 2.92%.

You should only invest in EE Bonds if you are absolutely certain you can hold them for 20 years. (And after 20 years they should be immediately redeemed.) They are a possible “bridge” investment for someone around age 40, who can build an annual stream of income starting at age 60, potentially delaying Social Security benefits until age 70.

The EE Bond will also outperform an I Bond if inflation averages less than 3.5% a year over the next 20 years. I think that is a reasonable possibility (but who knows, given current inflation trends). For anyone with a secure 20-year timeline for investment, an EE Bond remains somewhat attractive because of the tax-deferred interest and potential to use gains tax-free for educational purposes.

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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.

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.

Posted in I Bond, Inflation, Savings Bond | 21 Comments

Video: A financial adviser/tax specialist explains I Bonds

Your financial adviser should know about I Bonds and be willing to explain their obvious benefits and potential pitfalls.

Tipswatch.com

I consider U.S. Series I Savings Bonds to be among the simplest of all investments. They are savings bonds, after all, issued by the U.S. Treasury and can be purchased in amounts as small as $25. They earn tax-deferred interest and can be held for one year up to 30 years. They can never go down in value.

What could be simpler? Well …

In reality, I Bonds can have some complexities and finding answers to esoteric questions can be difficult. As I Bonds became an investing rage this year, I found myself Googling for answers to questions I had never heard before, and I’ve been writing about I Bonds for 11 years.

Here is a video from Andy Panko, founder of Tenon Financial based in Metuchen, N.J. He is a Certified Financial Planner and an enrolled IRS agent with a specialty in tax advice. Here is how he describes his financial services, for which he charges a flat annual fee ($9,600 for a couple, $8.400 for an individual):

We focus on helping you make the most of your retirement resources in a tax-efficient way. Our specialty is retirement income planning, aka decumulation planning…how to best live off your nest egg and other sources of retirement income. …

Unlike many advisors, our ongoing fee is not tied solely to the amount of your investable assets. The size of your investment accounts is generally a poor gauge of the complexity of your financial life and therefore a poor gauge of the amount of time and resources necessary to provide you proper planning and advice.

I discovered Andy when I came across his Facebook site, Taxes in Retirement, in its early days. The site now has 28,000 members — really active members, and Andy frequently jumps in to answer questions. He also posts frequent YouTube videos on financial topics and has a podcast, Retirement Planning Education.

I like that Andy tells you what he knows, and what he doesn’t know. Here is his discussion on I Bonds:

This video is actually a condensed version of Andy’s podcast, a 30-minute discussion on I Bonds. Here is a direct link to that more detailed version.

By the way, I have no connection to Andy Panko or Tenon Financial and I am sharing this simply because it demonstrates that a financial planner/tax adviser can — and should — understand I Bonds. I appreciate that Andy has taken the time to learn about I Bonds and talk about them with his clients, and with the rest of the world on Facebook, YouTube and podcast services.

Professor Zvi Bodie, who began promoting the I Bond Manifesto last year, came up with an “I-Bond Test of Trustworthiness” this month, wonderful in its simplicity:

Who can you trust for good financial advice and competent management of your personal wealth? Many of us rely on lawyers, accountants, wealth managers, and financial planners. There are two qualities that we ought to look for in any of these financial professionals: integrity and knowledge. Alone, neither of these is sufficient to justify our trust. Asking a simple question provides a quick test of both components of trustworthiness:

What do you think about I Bonds?

If the answer is “What are I Bonds?” then the professional has failed the knowledge part of the test. I Bonds have been in existence since 1998, and at times have clearly dominated all other personal investment opportunities for both the short run and the long run.

The correct answer is “You ought to buy I Bonds up to the legal limit because they are a safe, tax-advantaged liquid asset.”

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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.

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.

Posted in Investing in TIPS | 6 Comments