U.S. Inflation Rose A Mild 0.2% In May; What Does It Mean For TIPS And I Bonds?

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The May number came in below the consensus estimate of 0.3%, but core inflation rose to 2.2% for the last 12 months.

Increases in energy and shelter prices were offset by declines in food, apparel, and used cars.

Non-seasonally adjusted inflation was up 0.41%, continuing a string of strong increases.

The Consumer Price Index for All Urban Consumers increased 0.2% in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, 'headline inflation' rose 1.0%.

Although 0.2% is considered mild inflation, the May number came in below the consensus forecast of 0.3%. The 12-month number of 1.0% - down from 1.1% a month earlier - remains below the Federal Reserve's target of 2.0% inflation. The Fed is feeling no pressure from inflation as it continues delaying raising short-term interest rates.

Energy prices rose in May. Gasoline prices were up 2.3%, for example, but are still down 16.9% over the last 12 months. Also up were apparel costs (0.8%), shelter (0.3%) and medical care services (0.5%).

But those increases were offset by a wide range of price declines: food, down 0.2%; new vehicles, down 0.1%; used cars and trucks, down 1.3%; medical care commodities, down 0.2%.

When you take out food and energy, 'core' inflation rose 0.2% in May and was up 2.2% over the last 12 months. Shelter costs - up 3.4% over the last year - were a big factor in this increase.

What this means for TIPS and I Bonds. Holders of inflation-protected investments are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balances on TIPS and set future interest rates for I Bonds.

In May, the CPI-U inflation index rose to 240.236, up 0.41% from April's 239.261. This continues a string of strong increases in non-seasonally adjusted inflation: up 0.43% in March, 0.47% in April and now 0.41% in May. But over the last 12 months, the index is up just 1.0%.

For TIPS, the May increase of 0.41% will be reflected in principal balances through the end of July.

I Bonds are two months into the March to September rate-setting period, which will result in a new variable rate being set on November 1. Non-seasonally adjusted inflation has increased 0.88% from March to May.

In just two months, inflation has outpaced the last four 6-month rate setting periods:

  • September 2015 to March 2016: 0.08%
  • March 2015 to September 2015: 0.77%
  • September 2014 to March 2015: -0.80%
  • March 2014 to September 2014: 0.74%

While inflation remains muted at just 1.0% over the last 12 months, there are strong indications that prices are trending up, possibly increasing demand for inflation-protected investments. Here is the trend in core and headline inflation over the last year:

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