Treasury Inflation-Protected Securities

By David Enna, Tipswatch.com

Welcome to the most important (and most delayed) inflation report of the year: For September, seasonally adjusted U.S. inflation increased 0.3% and the annual rate ticked up from 2.9% to 3.0%, the beleaguered Bureau of Labor Statistics reported today.

While 3.0% is a too-high rate of inflation, this report will be seen as relatively benign because it came in lower than expectations. Core inflation increased 0.2% for the month and held steady at 3.0%. All the numbers were lower than expected.

This is a very important report because it sets in stone the new variable rate for U.S. Series I Savings Bonds and also sets the Social Security cost-of-living adjustment for payments in 2026. So let’s dive in.

I Bond variable rate

I Bond investors are interested in non-seasonally adjusted inflation, which is used to set future interest rates for I Bonds and also inflation accruals for Treasury Inflation-Protected Securities. The BLS set the September inflation index at 324.800, an increase of 0.25% over the August number.

That was the final piece needed to set the I Bond’s new variable rate, which will eventually roll into effect for all I Bonds, no matter when they were issued.

The new six-month, annualized variable rate will be 3.12%, up from the current 2.86%. Here are the data:

The I Bond’s permanent fixed rate will also update November 1, but we can’t say for certain what that rate will be. My projection, based on the 0.65 ratio formula that has worked for a decade, is that the fixed rate will fall to 0.90% from the current 1.10%.

If the fixed rate does drop to 0.9%, the new composite rate for purchases from November 2025 to April 2026 will be 4.03%, higher than the current 3.98%

What does this mean for investors? Although the variable rate will rise for November purchases, it is a better move to make investments in October (no later than Oct. 28) to lock in the fixed rate of 1.10%, which is permanent. You’d get 3.98% for six months and then 4.23% for the next six months.

For TIPS. The September inflation report means that principal balances for all TIPS will increase 0.25% in November, after rising 0.29% in October. Here are the new November Inflation Indexes for all TIPS.

Social Security COLA

The September inflation report was the third of three — for July to September — that determine the Social Security Administration’s cost-of-living adjustment for payments in 2026. The SSA uses a three-month average of a different index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to set its COLA.

For September, the BLS set CPI-W at 318.139, which produced a three-month average of 317.265, an increase of 2.8% over the same average for 2024. That means the Social Security COLA will be 2.8% for payments beginning in January. The numbers:

Note that the COLA increase of 2.8% lags the official annual rate of inflation at 3.0%. That’s disappointing, but it is not uncommon.

The COLA increase will boost the average Social Security payment by about $56 to an average monthly benefit of $2,071, starting in January. However, we are likely to see larger increases in Medicare costs, to be announced in November.

And, yes, I will pat myself on the back for this July 18 post: Forecast: Social Security COLA for 2026 should be around 2.8%

The inflation report

And now, much-delayed news from the BLS, which because of the shutdown assembled a skeleton staff to create this September inflation report. It reassured us with this: “Note that September CPI data collection was completed before the lapse in appropriations.” But that won’t be true for the October report.

No price data have been collected this month. The White House today announced that the October inflation report is not likely to be released because of the lack of data.

For September, the BLS noted that a 4.1% increase in gasoline prices was the largest factor in monthly inflation. But gasoline prices remain down 0.5% year over year. More from the report:

• Food at home costs increased 0.3% for the month and are up 2.7% year over year.
• The meats, poultry, fish, and eggs index rose 0.3% in September and 5.2% over the last 12 months.
• Shelter costs were up a relatively mild 0.2% after rising 0.4% in August. The annual increase was 3.6%.
• Costs of new vehicles rose 0.2% for the month and just 0.8% for the year.
• Costs of used cars and trucks fell 0.4% for the month but are up 5.1% for the year.
• Airline fares rose a sharp 2.7% for the month and are up 3.2% for the year.
• Motor vehicle insurance costs fell 0.4% for the month (finally!) but remain up 3.1% for the year.

It’s hard to quickly spot price increases related to tariffs, but apparel costs rose 0.7% in September. Meat costs were up 1.3% for the month and 8.5% for the year. Fresh vegetable costs rose 2.6% for the month.

Here is the annual trend for all-items and core inflation, showing the “not beautiful” alignment at 3.0%:

What this means for interest rates

So we got a “plus” that inflation was a bit lower than expected, along with a “minus” that 3.0% annual inflation is too high to sustain. (And it will probably go higher in coming months.)

The Federal Reserve at this point seems focused on a weakening U.S. labor market, so today’s relatively OK inflation report should allow it to continue its rate-cutting cycle. We can assume a 25-basis-point rate cut is coming next week, but without October inflation data the Fed will be flying blind into its December meeting.

From today’s Bloomberg report:

The lower-than-expected reading is a welcome surprise, especially for several Fed officials who are leery of cutting rates further. While the central bank was already widely expected to lower borrowing costs at its meeting next week, the report may help convince policymakers that they can do so again in December — especially in the absence of other official reports should the shutdown continue.

For the good of the nation, let’s hope this government shutdown ends soon and we can again see normal data flow. This is extremely important for creating trust in the stock and bond markets.

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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.