The Social Security COLA of 1.6% for 2020 is well below this year's increase of 2.8%, reflecting the dip in overall U.S. inflation this year.
The variable interest rate for U.S. Series I Savings Bonds will rise to 2.02% on November 1, up from the current 1.4%.
While overall inflation is being driven down by falling energy prices, core inflation is still running at a solidly-moderate rate of 2.4%.
The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, "headline" inflation increased 1.7%.
This is the most important inflation report of the year because it provides the final pieces of data needed to determine the 2020 cost-of-living adjustment for the nation's 67 million Social Security beneficiaries. It also sets in stone the next inflation-adjusted variable rate for U.S. Series I Savings Bonds.
So let's jump right in ...
Social Security COLA
The Social Security Administration will set next year's cost-of-living adjustment based on the average inflation index for July, August, and September, using data from a little-followed index: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
For September, the BLS set the CPI-W index at 250.251, up slightly from August's 250.112, and marking an increase of 1.5% over the last 12 months. But the annual increase doesn't figure into the SSA calculation, which looks just at the months of July, August and September. Based on that data, the Social Security COLA will rise 1.6% for payments beginning in January.
Here are the numbers used in this calculation:
For an average retiree who gets a monthly check of $1,460, the 1.6% COLA adds up to an additional $23.40 a month. However, retirees could also see increases in Medicare costs in 2020, possibly wiping out the COLA increase.
It's significant to note that the Social Security COLA increase of 1.6% is slightly lower than the overall U.S. inflation rate of 1.7% over the last 12 months. This happens, often, for two reasons: 1) the fact that CPI-W often lags slightly behind headline inflation (CPI-U), and 2) the unusual third-quarter averaging of three months minimizes potential one-month spikes in inflation. I have argued that this formula shortchanges seniors, and it will again in 2020.
I Bond Variable Rate
U.S. Series I Savings Bonds pay a combination of a fixed rate (currently 0.5% for investments through October) and an inflation-adjusted variable rate (currently 1.4% through October). While the fixed rate is permanent, the variable rate changes every six months.
On November 1, the U.S. Treasury will reset the I Bond's variable rate to 2.02%, based on non-seasonally adjusted inflation from March to September 2019. The BLS today set the September inflation index at 256.759, an increase of 0.08% over the August number, and up 1.7% over the last 12 months.
With this final piece of data, the I Bond's new inflation-adjusted variable rate (technically called the inflation rate) has been set in stone at 2.02%, based on the six-month inflation rate of 1.01%. That's up 61 basis points from the current variable rate of 1.40%. Here are those numbers:
This is good news for I Bond investors, because all I Bonds will eventually get the new 2.02% variable rate for six months. If you purchase an I Bond in October, you will get the current fixed rate of 0.5% permanently, plus the variable rate of 1.4% for six months, then 2.02% for six months.
Does this mean you should wait until November to purchase I Bonds to start off with the higher variable rate? Absolutely not, because the Treasury seems highly likely to lower the current fixed rate of 0.5% on November 1. The fixed rate is the I Bond's "real return," meaning its return above inflation, and the fixed rate is much more important that the six-month inflation rate.
I'll be writing more about this topic in the next week, handicapping what the fixed rate could look like in November and into 2020.
Treasury Inflation-Protected Securities
Today's inflation report means that the principal balances of all TIPS will rise 0.08% in November, following a 0.01% decrease in October. This is how TIPS track inflation: rising (or sometimes falling) with the monthly changes in non-seasonally adjusted inflation. Here are the new November Inflation Indexes for all TIPS.
The BLS reported that overall inflation was unchanged in September, below the consensus estimate of 0.1%. The 1.7% increase in year-over-year inflation also fell below the consensus estimate of 1.8%.
Once again, energy prices dominated the inflation news for September, with gasoline prices falling 2.4% for the month, and down 8.2% over the last year. Food prices were stable for the month, and are up 1.7% over 12 months.
Core inflation, which removes food an energy, also rose 0.1% in September, below the consensus forecast of 0.2%. But the year-over-year number of 2.4% matched the forecast and is a solid indicator that inflation is not "dead," as many investors seem to believe. As this chart shows, core inflation has been rising while headline inflation has been pushed lower by falling energy prices:
It's also notable that shelter costs rose 0.3% in September and are up 3.5% over 12 months; also, the costs of medical care services rose 0.4% and are up 4.4% over 12 months. Both of these costs potentially hit senior citizens hard, and these increases are much higher than the 1.6% increase in the Social Security COLA.
Future interest rates
Because overall inflation came in lower than expected, the Federal Reserve now has leeway in its plan to guide short-term interest rates gradually lower. I would expect at least one more 25-basis-point cut in 2019, possibly coming at this month's meeting of the Federal Reserve's Open Market Committee.
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.
Additional disclosure: David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges.