Inflation update of August 2013
Thursday, August 15th, 2013
Categorized as: Series I US Savings Bonds • TIPS
For June, the Consumer Price Index for All Urban Consumers (CPI-U) was 233.596, the Bureau of Labor Statistics announced today. This is up 1.96% from its level a year ago, up 2.88% (annualized) from its level six months ago, and up 0.04% (actual) from last month’s 233.504.
The Series I bond inflation component is based on the difference between the March and September levels of the CPI-U. The March level of 232.773 will be the base for the next rate announcement. If inflation for all six months of the period matches the rate during the first three months, the next I bond inflation component would be 1.06%.
For TIPS, the outstanding principal is adjusted up or down, using a daily index, to compensate for inflation. Today’s inflation announcement will be applied to TIPS next month. Expressed as an annual rate, next month’s TIPS inflation adjustment will be 0.47%.
The red line on the following graph shows the level of the CPI-U for each month since Series I bonds were introduced.
The short, horizontal blue lines in the graph are each six-months long and begin on their left end in March or September and end on their right end the following September or March.
The up-and-down space between the blue lines represents the change in the CPI-U during the six-month period, which is also shown as one of the bars in the bar graph.
The percentages on the graph indicate the change, expressed as an annual rate, for each six-month period. These are the same percentages the Treasury uses to calculate composite Series I bond interest rates for these periods.
When the inflation component goes negative, as it did in the September 2008 – March 2009 period, it can wipe out an I bond’s fixed rate. However, an I bond’s composite rate can’t go below zero, no matter how deeply the CPI-U dips. This gives I bonds an advantage over the Treasury’s big-boy inflation security, TIPS, which do decline in value when the CPI-U change is negative.
It’s clear from the questions I receive that many I bond investors don’t understand that the rates earned by their I bonds change every six months based on the inflation rate.
For the curious, here’s complete information on how I bond interest rates are determined.
The CPI-U uses the price levels of 1982-1984 as its base of 100.