The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, "headline" inflation increased just 1.6%, the lowest number since June 2017.
January's number continues a trend of slowing inflation, primarily spurred by falling gasoline prices. As recently as June 2018, annual inflation was running at 2.9%, but has been steadily declining since then.
In January, the energy index declined for the third consecutive month, the BLS said, offsetting increases in the indexes for many other items. Gasoline prices fell 5.5% in the month and are now down 10.1% over the last year. That offset a 0.2% increase in the price of food, and a 1.1% increase in apparel prices. Shelter prices increased 0.3%.
It's interesting to note that food prices have increased three consecutive months, but remain just 1.6% higher over the last 12 months.
Core inflation, which removes food and energy, increased 0.2% in January and is now up 2.2% over the last 12 months. This shows how energy prices have been a major factor in declining inflation over the last year. Here is the one-year trend for headline and core inflation, showing how core inflation has remained stable at moderate rates, while the all-items index has plummeted:
(Source: Bureau of Labor Statistics)
What this means for TIPS and I Bonds
Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates for I Bonds.
The BLS set the January inflation index at 251.712, 0.19% higher than December's number. Non-seasonally adjusted inflation has increased 1.6% over the last year.
For TIPS. Today's report means that principal balances for all TIPS will be adjusted 0.19% higher in March, after falling a total of 0.65% in the previous two months because of declining inflation in November and December. Here are the new March inflation indexes for all TIPS.
For I Bonds. The January inflation number is the fourth in a six-month series that will determine the I Bond's new inflation-adjusted variable rate, which will be reset in May, based on inflation from September 2018 to March 2019. At this point, four months into the period, non-seasonally adjusted inflation has declined 0.29%. This equates to an I Bond variable rate of -0.58%, compared to the current rate of 2.32%. Two months remain, but the trend is not looking good for the May rate adjustment. Here are the numbers so far:
For I Bond investors, a negative variable rate will wipe out a positive fixed rate, but the composite rate can never fall below zero. Because the current fixed rate of 0.5% may fall in the May reset, investors might want to buy before May 1, locking in both the 0.5% fixed rate (forever) and the current 2.83% composite rate (for six months).
I think the fixed rate could fall in May. I'll write more about this in April.
What this means for future interest rates
The Federal Reserve has already announced its intention to scale back future increases in short-term interest rates. Today's report shouldn't change that course. Headline inflation is falling, and core inflation remains stable at a moderate level. Until gasoline prices change course, it's unlikely the Fed will step up interest rate increases, although one or two increases remain possible - if unlikely - in 2019.
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.