U.S. Inflation Increased 0.2% In August; What Does This Mean For I Bonds And TIPS?

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Summary

  • Headline inflation has increased just 1.1% over the last 12 months.
  • Core inflation, however, was up 0.3% in August and 2.3% over the last 12 months.
  • The I Bond variable interest rate looks likely to get a big bump up on November 1.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, 'headline' inflation rose 1.1% before seasonal adjustment.

This was a particularly interesting month, because the overall energy and food indexes played no role in the inflation number - both were up 0.0% in August. Gasoline prices were down 0.9% in the month, however, and are still down 17.3% over the last 12 months.

Of note in the inflation report: Medical care commodities were up 1.1% in August and medical care services were up 0.9%. Both of those are strong numbers. Apparel was up a moderate 0.2% and shelter up 0.3%.

Core inflation - which strips out food and energy - was up 0.3% in August and has increased 2.3% over the last year. Even though overall inflation remains muted, core inflation has been rising, and at this point, has surpassed the Federal Reserve's target of 2.0% annual inflation. Could this lead to higher interest rates later this year? The Fed would have to admit that this 12-month chart seems to depict 'moderate' inflation, and certainly not deflation:

What the August number means for I Bonds and TIPS. Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates on I Bonds.

In August, the CPI-U index was set at 240.853, an increase of 0.09% over July's 240.647. The August number will be used to increase the principal balance of TIPS 0.09% in October. For example, the index ratio on a 10-year TIPS maturing in July 2018 will increase from 1.11597 on October 1 to 1.11689 on October 31. See all the October index ratios

This article was written by

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I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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