Coming October 13: The most significant inflation report in a decade

Posted on October 6, 2021 by Tipswatch

September inflation numbers should nail down the Social Security COLA at 5.8%+ and set the I Bond’s inflation adjusted rate at 6.5%+, annualized.

By David Enna, Tipswatch.com

Next Wednesday, at 8:30 a.m. EDT, we’re going to get a whopper of an inflation report. That is when the U.S. Bureau of Labor Statistics will release the official U.S. inflation numbers for September, setting in stone next year’s Social Security COLA and the next 6-month inflation-adjusted interest rate for U.S. Series I Savings Bonds.

Both Social Security and I Bonds will be getting historically high numbers: The Social Security COLA should be increasing 5.8% or more for payments beginning in January (the highest increase since 2008), and the next I Bond inflation-adjusted rate should soar to somewhere near 6.9%, annualized That would be the highest six-month variable rate in history. The next highest was 5.7% set in November 2005.

Let’s take a look at what’s coming up in next week’s inflation report.

Social Security COLA

The Social Security COLA 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 with the same average for the year before. For 2021, the COLA was set at 1.3% with the release of the September inflation report on Oct. 13, 2020.

I have been projecting that the 2022 COLA looks likely to fall into a range of 5.8% to 6.2%. The July and August inflation reports have been in line with that projection. At this point, the data seem to point to a 5.8% increase in the Social Security COLA, but that will rise if inflation continues to surge in September’s inflation report.

We won’t know the actual COLA number until the September inflation report is released, completing the data needed for the 3rd quarter average of CPI-W. Here are the numbers so far:

So let’s be conservative and say that CPI-W (technically, the Consumer Price Index for Urban Wage Earners and Clerical Workers) increased by 0.2% in September. That would make the average for the indexes from July to September 268.366, an increase of 5.9% over the average for the same months of 2020. The Social Security COLA then would be set at 5.9% for payments in 2022.

The Social Security Administration currently estimates that the average retired beneficiary receives $1,555.25 a month, so a 5.9% increase would boost that monthly payment to about $1,647, an increase of $91.75 a month. If you are in the Social Security “limbo” period — older than 62 but not yet taking benefits — your future benefits would also climb by this percentage.

However, recipients can also expect that Medicare Part B costs will rise in 2022, which will subtract — at least partly — from the higher benefits. The base premium is now $148.50 a month. I could see that rising to $158 a month, cutting the effect of the COLA increase by $9.50 a month. But this is just speculation.

Also, read this: More details on the complex Social Security COLA formula

Series I Savings Bonds

I Bonds have two components that make up their composite rate (total yield): a fixed rate and an inflation rate.

  • The fixed rate is fixed for the entire life of any given I Bond. The fixed rate for newly-issued I Bonds is announced on May 1 and November 1 of each year, and applies to all I Bonds issued during that six-month period. The fixed rate is equivalent to the “real” yield of an I Bond, meaning the yield above inflation. It is currently set at 0.0% and is highly likely to remain at 0.0% at the November reset.
  • The inflation rate is based on the Consumer Price Index and is also announced every six months, on May 1 and November 1. The May rate is based on the change in the CPI-U from the previous September to March and the November rate on the change from March to September. This inflation adjustment applies to both existing I Bonds and newly-issued ones, but the timing of that adjustment depends on the original issue date of the I Bond.

An I Bond purchased before Oct. 31 will have a fixed rate of 0.0% and an inflation-adjusted rate of 3.54%, creating a composite annualized rate of 3.54% for six months.

We have completed five months of the six-month string to determine the next inflation-adjusted rate, which is currently running at 6.56% annualized. If inflation comes in at 0.2% for September (it could be higher), the annualized rate will jump to 6.96% for six months.

The formula used to set the inflation-adjusted variable rate for I Bonds doubles the six-month inflation number, creating an annualized rate of return, which investors get for six months. Here are the numbers so far, five months into the rate-setting period:

If the inflation-adjusted rate comes in around 6.9% it will be, by far, the highest six-month variable rate in the I Bond’s history, dating back to September 1998. There has never been a variable rate above 6.0%.

Purchases of I Bonds are limited to $10,000 per person, per year (plus an opportunity to get $5,000 in paper I Bonds in lieu of a federal income tax refund). So, should you buy before November 1, or after November 1?

I recommend buying before Oct. 31 to lock in the 3.54% rate for six months, and then you will get that close-to-7% rate for the next six months. Starting off with six months at 3.54% and then getting 6 months at 6.9% is super attractive in today’s market.

You have to hold an I Bond for 12 months before you can redeem. The combined rate over the year is going to top 5.2%, about 10 times what you can earn on a 1-year CD. But either way — before or after Nov. 1 — the investment is attractive. Also, keep in mind that the purchase cap resets on January 1, so you’ll be able to make another purchase getting the full six months of near-7% rate.

Also, read this: I Bond Manifesto: Why inflation-linked savings bonds can work as part of your emergency fund

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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, Savings Bond, Social Security | 32 Comments

I Bond Manifesto: Why inflation-linked savings bonds can work as part of your emergency fund

Posted on September 26, 2021 by Tipswatch

Sept. 26, 2021

It’s no secret that I’m a huge fan of U.S. Series I Savings Bonds, a simple, very safe investment that can accurately track — or exceed — official U.S. inflation without risking a dime. I’ve been pounding the table for I Bonds for a decade.

Over the next 12 months, I Bonds look likely to provide a yield of 5.0% (or more), about 10 times the return of best-in-nation insured savings accounts. (Nov. 1 update: I Bond’s inflation-adjusted rate soars to 7.12%, annualized, for six months)

And now, Professor Zvi Bodie, a long-time advocate of inflation-protected investments, is on a mission: To persuade the Consumer Financial Protection Bureau to include I Bonds in its list of recommended investments for an investor’s “emergency fund,” a safe place to store cash for unexpected needs, like a job loss. He recruited me — along with inflation watchers Mel Lindauer and Michael Ashton — to help advance the cause. The result was this:

The I Bond Manifesto

Financial planners and investment advisors all tell you to create an emergency fund before you start investing in risky assets. Your emergency fund should be held in safe and liquid assets like FDIC-insured saving accounts. But interest rates on these accounts are close to zero and taxable. Moreover, if these accounts are retirement accounts such as an IRA, withdrawals before age 59 1⁄2 are subject to a 10% penalty in addition to taxes on the withdrawals.

So where should people invest their emergency funds? We say they should consider U.S. Treasury Series I Saving Bonds, commonly called I Bonds.

Background on I Bonds

First introduced in September 1998, I Bonds (the “I” stand for “Inflation”) are inflation-protected, are issued by the United States Treasury, and provide a guaranteed real rate of return for 30 years. This is in contrast to the nominal fixed rate of interest provided by most traditional bonds and CDs. The total yield of an I Bond is made up of two components: a fixed rate that remains the same for the 30-year life of the bond, and an inflation adjustment that’s reset every six months. The fixed rate is currently zero, and the last inflation adjustment in May 2021 was 3.54% per year. You add these two components together to arrive at the composite rate of 3.54% per year.

I Bonds were designed primarily for small savers/investors. You can buy a maximum of $10,000 of I Bonds a year for each Social Security number via TreasuryDirect. In addition you can buy them with any federal tax refund due to you, up to $5,000, for which you will receive paper I Bonds. You cannot hold them in a special retirement account, but the taxes due are deferred until maturity or the date they are redeemed. (Editor’s note: I Bonds must be held 12 months before you can redeem them.) If you redeem I Bonds prior to five years, you’ll lose the last three months’ interest. After holding them for five years, there is no penalty for redeeming I Bonds before maturity, except that the federal tax on the interest must be paid in the same year as the redemption.

I Bonds offer many benefits:

  1. They’re risk-free. They are obligations of the U.S. Treasury, so they are even more secure than Social Security benefits. (It is possible for the U.S. Treasury to default on these bonds, so strictly speaking they are not completely free of default risk as explained above.)
  2. They offer inflation protection. That’s especially important for retirees who no longer have wage increases to rely upon. With all the current government spending and deficits,inflation could return with a vengeance. I Bonds protect you against the ravages of future inflation.
  3. They’re tax-deferred. Even though you purchase I Bonds with after-tax money for your taxable account, they offer tax deferral for up to 30 years. You can elect to report the interest annually if you prefer, but most investors choose the default tax deferral option and thus only pay tax on the accumulated interest when they eventually redeem the I Bonds.
  4. They’re flexible. They offer a tax timing option. They can be redeemed any time between one and 30 years. That offers lots of flexibility after owning them for one year. This flexibility allows you to buy I Bonds when you’re in a high tax bracket and redeem them when you’re in a lower tax bracket, such as after you’ve retired or are temporarily out of work.
  5. They’re free from state and local taxation. This can mean higher after-tax returns for those investors who live in high-tax states, and they’re even better yet for folks who live in areas where they pay both state and local taxes.
  6. If used for qualifying educational expenses, the interest earned is free from federal taxes.
  7. They offer a put option. If future I Bonds offer a more attractive fixed rate, it may make economic sense to redeem the older lower-yielding I Bonds, pay the taxes due on the interest earned, and then buy the newer I Bonds with the higher fixed rate. (Remember, however, if you redeem I Bonds within the five years of purchase, you will forfeit the last three months of interest.)
  8. You can’t lose money. The composite rate can never go below 0%. I Bonds will never return less in nominal terms than you invested in them even if the country enters a prolonged period of deflation. You never lose the interest you’ve earned. In real terms you do better if there is deflation than if there is inflation. A recent bout of reported deflation took the I Bond composite yield to 0% for a six-month period. But as a result of the 0% “floor,” holders actually outstripped inflation by more than the guaranteed fixed rate during that period. So, if your I bond was worth $10,000 before that period of deflation, it would have been worth $10,000 after the deflation adjustment period ended. However, because of deflation, that $10,000 would buy more goods and services.

How I Bonds work

Now let’s explore the mechanics of purchasing and redeeming I Bonds and talk a bit about how they work. You must first open an individual account at TreasuryDirect.gov and link it to your bank account. Once your account is open, you can then make your purchases online and the Treasury will deduct the purchase price from your linked bank account.

Purchase limits. There is an annual purchase limit of $10,000 in I Bonds in electronic form per Social Security number. A married couple could, therefore, purchase a total of $20,000 per year.

A tax-time purchase option. The option to use your tax refund to buy up to $5,000 in paper I Bonds raises your limit from $10,000 to $15.000 in that year–$10,000 in electronic form and $5,000 in paper form.

Timing your purchases. Interest is earned on the last day of each month and is posted to your account on the first day of the following month. So, if you own your I Bonds on the last day of any month, you’ll earn that full month’s interest. Therefore, it’s best to buy your I Bonds near the end of the month, since you can earn a full month’s interest while only owning the I Bonds for perhaps a day or two. On the other hand, when redeeming I Bonds, you’ll want to do so on or near the first business day of the month, since redeeming them later in the month won’t earn you any additional interest.

Redeeming paper I Bonds. Simply take your paper I Bonds to your bank, sign the back and the bank will credit your account just as if you had deposited cash. The funds will normally be available to you the following day. You could also receive cash.

Redeeming electronic I Bonds. You can redeem your I Bonds (or any portion of your bond holdings, so long as you leave at least $25 in your account) using your online account. The money is then transferred into your linked bank account.

Avoiding probate. I Bonds don’t qualify for a step-up in cost basis at one’s death as many other investments, such as stocks and real estate, do. (I Bonds are like bank-CDs in that regard.) But you can title them in such a way as to avoid having them included in your estate subject to probate—by having either a second co-owner or a beneficiary listed on your I Bonds.

Signed by:

Zvi Bodie
zbodie@bu.edu, zvibodie.com
America’s Best Kept Investing Secret

Mel Lindauer
Founder and Former President, The John C. Bogle Center for Financial Literacy
and co-author The Bogleheads’ Guide to Investing, and The Bogleheads’ Guide to Retirement Planning

David Enna
Tipswatch.com

Michael Ashton, “The Inflation Guy”
EnduringInvestments.com Podcast: Cents and Sensibility

Posted in I Bond, Retirement | 37 Comments

10-year TIPS reopening gets real yield of -0.939%, well off record low

Posted on September 23, 2021 by Tipswatch

By David Enna, Tipswatch.com

The Federal Reserve’s statements Wednesday indicating a timeline for tapering its bond purchases and eventual moves to raise interest rates gave investors at Thursday’s 10-year TIPS reopening auction a bit of a boost.

This auction of a 9-year, 10-month Treasury Inflation-Protected Security, CUSIP 91282CCM1, generated a real yield to maturity of -0.939%, holding above the record low for any auction of this term, -1.016%, set in the July 21, 2021, originating auction for this TIPS.

A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So the “real yield to maturity” of a TIPS indicates how much an investor will earn above (or in this case, below) inflation.

Just a day ago, 10-year real yields were running very close to -1.0%, meaning investors would accept a return that lagged official U.S. inflation by 1.0% a year, for 10 years. But the Fed’s actions Wednesday gave Treasury bond yields a slight boost higher, and investors at today’s auction benefited.

CUSIP 91282CCM1 has a coupon rate of 0.125%, which was set at that July originating auction and is the lowest the Treasury will go for any TIPS. That means investors at today’s auction had to pay a sizable premium — an adjusted price of about $112.98 for about $101.84 of value, after accrued inflation is added in. This TIPS will have an inflation index of 1.01843 on the settlement date of Sept. 30.

The real yield of -0.939% ended up being pretty much in line with several auctions of this 9- to 10-year term:

  • Jan. 21, 2021: -0.987%
  • Sept. 20, 2020: -0.966%
  • July 23, 2020: -0.930%

That’s a depressing list for TIPS investors, who should be coveting real yields at least 50 basis points above zero, providing a positive return over inflation. We are a long way off from that, but possibly the Federal Reserve will carry through on plans to lift interest rates in the next two years.

Here is the trend in 10-year real yields over the last two years, showing the deep plummet after the Federal Reserve began aggressive bond buying in March 2020. Note that we remain very close to the bottom of this range:

Inflation breakeven rate

With a nominal 10-year Treasury note trading this afternoon with a yield of 1.40%, this TIPS gets an inflation breakeven rate of 2.34%, in line with several recent auctions of this term. It means CUSIP 91282CCM1 will outperform a 10-year nominal Treasury if inflation averages more than 2.34% over 9 years, 10 months. While that breakeven rate is historically high, it seems reasonable given the nation’s recent surge of inflation.

Here is the trend in the 10-year inflation breakeven rate over the last 2 years, showing the incredible surge higher after the deep market chaos of March 2020. In recent months, 10-year inflation expectations have leveled off in the 2.3% to 2.4% range:

Reaction to the auction

This TIPS trades on the secondary market, and earlier this morning, at 11:05 a.m., it was trading with a real yield to maturity of -0.92%. So the eventual result of -0.939% looks like this auction was met with solid demand. The bid-to-cover ration was 2.55%, also an indication of solid demand.

If the Federal Reserve carries through with tapering its bond-buying, beginning in November, we should begin to see a gradual increase in real yields, moving in lockstep with nominal yields. The TIPS market is not heavily traded, and the Federal Reserve’s purchases have had a major effect in pushing real yields deeply negative. That should begin to change, but gradually.

CUSIP 91282CCM1 will have one more reopening auction, on Nov. 18. It will be interesting to see if 10-year real yields climb a bit in the next two months, making that auction potentially more attractive.

Here is a history of recent 9- to 10-year TIPS auctions, showing how the Fed’s aggressive bond-buying, which began in March 2020, has pushed real yields deeply negative:

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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 | 1 Comment

10-year TIPS reopening looks likely to hover near record-low real yield

Posted on September 19, 2021 by Tipswatch

The U.S. Treasury will offer $14 billion at auction on Thursday. Who’s interested?

By David Enna, Tipswatch.com

Even as the Federal Reserve is hinting loudly that it will soon begin tapering its $80 billion in monthly Treasury purchases, the real yield of a 10-year Treasury Inflation-Protected Security remains very close to record-low auction levels.

The last time the Fed launched an actual tapering program, in 2013, the real yield of a 10-year TIPS soared 142 basis points in a single year. But today’s investors either don’t care, or don’t believe the Fed has the courage to act.

So that brings us to Thursday’s reopening auction of CUSIP 91282CCM1, creating a 9-year, 10-month TIPS. The originating auction for this TIPS — on July 22, 2021 — generated a real yield to maturity of -1.016%, the lowest in history for any TIPS auction of this term. Its coupon rate was set at 0.125%, the lowest the Treasury will go for a TIPS.

A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So the “real yield to maturity” of a TIPS indicates how much an investor will earn above (or in this case, below) inflation.

CUSIP 91282CCM1 trades on the secondary market, so you can track its real yield and cost in real time on Bloomberg’s Current Yields page. As of Friday’s market close, this TIPS was trading with a real yield to maturity of -0.99% and a cost of about $111.49 for $100 of par value. The cost is much higher than par value because the real yield to maturity is well below the coupon rate of 0.125%.

In simple terms, investors are willing to pay an 11.5% premium for this TIPS, even though the investment will end up lagging official U.S. inflation by nearly 1% for 9 years, 10 months.

Also of interest is that this TIPS will carry an inflation index of 1.01843 on the settlement date of Sept. 30. That means investors will pay an additional 1.8%, but receive a matching amount of additional principal. At this point, the adjusted price looks like it will be about $113.54 for $101.84 in value, after accrued inflation is added in. But things can change before Thursday.

Here is 2021’s year-to-date trend in 10-year real yields, with the entire year presenting real yields well below zero. The Treasury’s recent hints about tapering have moved real yields slightly higher, but not significantly:

Inflation breakeven rate

With a nominal 10-year Treasury currently trading with a yield of 1.36%, this TIPS has an inflation breakeven rate of 2.35% as of Friday’s close. That is well below the current U.S. inflation rate of 5.3%, but well above the average U.S. inflation of 1.9% over the last 10 years.

I think 2.35% looks like a reasonable number. Here is the question posed by the 10-year inflation breakeven rate: Would you rather invest in a 10-year nominal Treasury paying 1.35% a year, or a 10-year TIPS lagging U.S. inflation by 0.99% a year? If you think inflation will average less than 2.35%, you buy the nominal Treasury. If you think inflation will be higher than 2.35%, you buy the TIPS.

Here is 2021’s year-to-date trend for the 10-year inflation breakeven rate, showing that inflation expectations have leveled off since early summer:

Thoughts on this auction

I think enough big-money investors will decide that a 10-year TIPS remains a decent alternative to a 10-year Treasury note, and demand at Thursday’s auction will at least be satisfactory. But this offering isn’t very attractive for a small-scale investor.

The obvious alternative in September 2021 is the Series I Savings Bond, which offers a real yield of 0.0%, 99 basis points better than CUSIP 91282CCM1. It will accurately track official U.S. inflation, even as this TIPS lags behind by 0.99% a year. So a small-scale investor’s first choice should be I Bonds, up to the $10,000 per person per year limit. After that, consider TIPS when the real yields look attractive (and in September 2021, they don’t).

For more on I Bonds, read this: I Bonds vs. TIPS: What’s the best bet for inflation protection? Also, you can read a primer on my Inflation and I Bonds page.

Investors interested in this auction should continue checking Bloomberg’s Current Yields page to watch for yield shifts. Noncompetitive bids — like those made at TreasuryDirect or a brokerage — have to be placed by noon Thursday. The auction closes at 1 p.m. EDT.

I am traveling this week, but I hope to post the auction results soon after the close.

Here’s a history of recent TIPS auctions of this term, showing the depressing string of 8 consecutive auctions with real yields negative to inflation:

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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 | 3 Comments

August inflation: What it means for Social Security COLA, I Bonds and TIPS

Posted on September 14, 2021 by Tipswatch
  • U.S. inflation increased 0.3% in August, under the consensus estimate.
  • At this point, the Social Security COLA will increase 5.8% for payments in January, but one month of data remains.
  • The I Bond’s new inflation-adjusted variable rate is on track to increase to 6.56%, annualized, for six months. One month of data remains.

By David Enna, Tipswatch.com

U.S inflation slipped slightly under consensus estimates in September, but remains at a brisk pace throughout the economy.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.3%. The monthly number fell just short of the consensus estimate of 0.4%, but the year-over-year number matched the consensus.

Inflation vs. consensus

Core inflation, which removes food and energy, increased only 0.1% in August, the BLS reported. That was below the consensus estimate of 0.3%. This was the smallest monthly increase for core inflation since February 2021. Year-over-year core inflation came in at 4.0% for the month, also below the consensus.

The August report shows that inflation continues at a brisk pace across many sectors of the U.S. economy. For example, gasoline prices rose 2.8% for the month, and are up 42.7% over the last year. Some other examples:

  • Food prices increased 0.4% for the month and are up 3.7% year over year. The BLS said the index for meats, poultry, fish, and eggs rose 0.7% over the month, which won’t surprise grocery shoppers.
  • Shelter costs increased 0.2% for the month and are up 2.8% for the year.
  • The costs of medical care services were up 0.3%, but are up only 1.0% for the year.
  • The index for used cars and trucks fell 1.5%, but is still up 31.9% year over year.
  • The cost of new vehicles rose a sharp 1.2% for the month, and is up 7.6% for the year.
  • The index for transportation services fell a sharp 2.3%. One reason: The index for airline fares fell 9.1% over the month.

Here is the 12-month trend for both all-items and core inflation over the last 12 months, showing that U.S. inflation seems to be stabilizing at a fairly high level:

What this means for the Social Security COLA

The August inflation report is the second of three — for July to September — that will set the Social Security Administration’s cost of living adjustment for 2022. 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 August, the BLS set CPI-W at 268.387, an increase of 5.8% over the last 12 months. But remember, it will be the average of July to September inflation indexes — compared to the same three-month average a year ago — that will determine the Social Security COLA. In a recent article, I had predicted a COLA increase in the range of 5.8% to 6.2%.

At this point, the data are pointing to a 5.8% increase in the Social Security COLA, but that will rise if inflation continues to surge in September. Here are the numbers so far, with one month remaining:

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 August, the BLS set the CPI-U inflation index at 273.567, an increase of 0.21% over the July number.

For I Bonds. The August inflation report is the fifth in a six-month string that will determine the new inflation-adjusted variable rate for all I Bonds, to be reset on Nov. 1. At this point, with one month remaining, U.S. inflation has been running at 3.28%, which would translate to a new variable rate of 6.56%, annualized, for six months.

I Bonds are suddenly getting a lot of investor attention, and rightly so with a six-month annualized yield of 6.5% on the horizon. But the biggest benefits will go to those investors committed to purchasing I Bonds every year up to the $10,000 per person per year cap. Newcomers can also benefit: I Bonds purchased before Oct. 31 are likely to have a 12-month return of around 5.0%, 10 times the yield of best-in-nation insured savings accounts.

You can find a lot more information on I Bonds on my “Inflation and I Bonds” page, where I track all the monthly inflation updates and provide a primer on I Bonds. Also, read The I Bond Manifesto, which makes the case for including I Bonds in your emergency fund.

For TIPS. The August inflation report means that principal balances for all TIPS will increase 0.21% in October, ending a seven-month string of increases higher that 0.40%. Here are the new October inflation indexes for all TIPS.

What this means for future interest rates

Today’s inflation report — which came in lower than consensus estimates after months of upside surprises — probably gives the Federal Reserve some breathing room. I think the Fed will continue with its plans to gradually taper down its $80 billion a month in Treasury purchases, but the pressure is off (for a month, at least). A very gradual program of tapering should cause longer-term Treasury yields to rise a bit, but not dramatically, off the currently very low levels.

Any increase in short-term interest rates looks to be 12 to 18 months away.

This morning’s Wall Street Journal headline sums things up well: “Inflation Eased in August, Though Still High.” From that report:

Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, anticipates the emergence of longer-term price pressures in coming months.

The August CPI report “might be a little bit of a headfake, honestly,” suggesting that the recent inflation surge is proving to be transitory, as economists have predicted, “but other factors might be moving under the surface,” said Ms. Rosner-Warburton.

Inflation continues to run well above the Federal Reserve’s target of 2.0% — or is it really 2.5%? — a year. If this surge in inflation is transitory, the Fed can take its time making repairs. But if it isn’t, actions will be needed. We’ll see in future months.

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Note: I am on the road this week and I’m writing this without my usual setup for calculations and images. Forgive any rough edges and let me know if you see errors.

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, Retirement, Social Security | 3 Comments