Inflation update of December 2014
Wednesday, December 3rd, 2014
Categorized as: Series I US Savings Bonds • TIPS
For October 2014, the Consumer Price Index for All Urban Consumers (CPI-U) was 237.433, the Bureau of Labor Statistics announced a few days ago. This is up 1.7% from its level a year ago, and down less than 0.01% (actual) from last month’s 238.031.
The Series I bond inflation component is based on the difference between the March and September levels of the CPI-U. The March 2014 level was 236.293 and September 2014 level was 238.031, for an increase of 0.74% or annualize rates of 1.48% The next adjustment to the variable interest rate component of i Bonds will be based upon comparing inflation from September 2014 to March 2015.
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.