Inflation update of April 2015
Wednesday, May 27th, 2015
Categorized as: Series I US Savings Bonds • TIPS
For April 2015, the Consumer Price Index for All Urban Consumers (CPI-U) was 236.599, the Bureau of Labor Statistics announced a few days ago. This is down 0.2% from its level a year ago, and up 0.1% (actual) from last month’s 236.119.
The Series I bond inflation component is based on the difference between the September and March levels of the CPI-U. The September 2014 level was 238.031 and March 2015 level was 236.119, for a negative rate of inflation. As the inflation based interest rate component of I bonds cannot be negative, the inflation based component is 0.0%. The next adjustment to the variable interest rate component of i Bonds will be based upon comparing inflation from March 2015 to September 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.