Savings Bond Alert #021

May prices up 4.2% from a year ago

The Bureau of Labor Statistics announced this morning that prices were up 4.2% in May compared to a year ago. You may see lower percentages in the newspapers, but they refer to core inflation, which doesn’t include increases in food and energy prices. Core inflation is of interest to economists, but not us.

The Series I bond inflation component is based on the difference between the March and September levels of the total Consumer Price Index.

If prices rose no farther, in September the next I bond inflation component would be set at 2.70%. At the other extreme, if inflation for the six-month Mar-Sep period matches the rate of the first two months, April and May, the next I bond inflation component would be 8.11%.

Those are the extremes - the next I bond inflation component will almost certainly be between those two figures.

The rising levels of inflation are a concern to the Federal Reserve Board, which has the mandate to control inflation. They do so by raising interest rates. But higher interest rates tend to slow economic growth, so stocks markets have been falling recently. Although the drop in the US has been noticable, in other countries - especially developing economies - the fall has been drastic.

With markets falling, it’s been a good month to own Savings Bonds.

A sample of stories on the Savings Bond Advisor web site in the last month include:

• Does the new I bond rate have you worried?
• Tax law change impacts kiddie tax and Roth IRAs
• Do Federal Reserve inflation targets eliminate the need for inflation protection?
• Savings Bonds gadget for Google home page