Inflation again rose higher than expected in March, probably putting Fed rate cuts on hold.
By David Enna, Tipswatch.com
Updated analysis … I Bond dilemma: Buy in April, in May, or not at all?
Non-seasonally adjusted inflation rose 0.65% in March, the Bureau of Labor Statistics reported this morning, which sets the inflation-adjusted variable rate for U.S. Series I Savings Bonds at 2.96% for the May 1 reset.
I Bond purchases through the end of April carry a permanent fixed rate of 1.3% and a variable rate of 3.94%, resulting in an annualized composite rate of 5.27% for a full six months. At the May 1 reset, that variable rate will fall to 2.96% for I Bonds purchased in May to October, and then eventually for all I Bonds after six months of the 5.27% rate.
The I Bond’s fixed rate, which is permanent through its potential 30-year term, will also be reset on May 1. It appears likely, at this point, that the new fixed rate could fall into the 1.2% to 1.3% range.
Here are the inflation data used to determine the variable rates:
What does this mean?
I will be writing more about this later this week, but today’s inflation report makes an I Bond investment in April preferable to a purchase in May. The April purchase will get a composite rate of 5.27% for a full six months, and then a rate of 4.27% for six months.
We won’t know what the composite rate will be for a purchase in May until the May 1 fixed-rate reset, but it is likely to be in the range of 4.17% to 4.27%.
Is a variable rate of 2.96% attractive? Not really in our current market, but that isn’t the important factor. The fixed rate of 1.3% is much more important than the variable rate.
Of course, if you are holding older I Bonds with fixed rates of 0.0%, you are going to earn 2.96% for six months after the current composite rate of 3.94% runs a full six months. This shows the value of the 1.3% fixed rate.
What about TIPS?
For March, the BLS set the non-seasonally adjusted inflation index at 312.332, which I noted was a 0.65% increase over the February number. This means that principal balances for all TIPS will increase 0.65% in May, after rising 0.62% in April.
These one-month numbers might look gaudy, but this is partially due to the way non-seasonal inflation works. The numbers tend to run higher than adjusted inflation from January to June, and then lower from July to December. Recall that in the October to December period we had three consecutive months of negative non-seasonally adjusted inflation.
Here are the new May Inflation Indexes for all TIPS.
The inflation report
While the stock and bond markets seemed to react to February’s higher-than-expected inflation with a yawn, this March report will be harder to ignore. Seasonally-adjusted all-items inflation came in at 0.4%, higher than the expectation of 0.3%. The annual inflation rate rose from 3.2% in February to 3.5% in March.
Core inflation, which removes food and energy, also exceeded expectations, rising 0.4% for the month and 3.8% year over year.
The BLS pointed to several factors that contributed to higher inflation. Costs of shelter increased 0.4% and are now up 5.7% year over year. Gasoline prices increased 1.7% in March after rising 3.8% in February and are now up 1.3% year over year.
Food prices, however, continued rising at a moderate pace, up 0.1% for the month and 2.2% over 12 months. The costs of food at home were unchanged. More items from the report:
- Electricity costs rose 0.9% for the month and 5.0% year over year.
- Costs of motor vehicle insurance rose 2.7% for the month and a ridiculous 22.2% year over year.
- Medical care costs rose 0.6% and are up 2.1% year over year.
- Airline fares rose 3.6% for the month but were down 0.4% for the year.
- Apparel costs rose 0.7% but are up only 0.4% year over year.
- Costs of used cars and trucks fell 1.1% and are down 2.2% over the year.
- New vehicle prices also fell 0.2% and are down 0.1% year over year.
Here is the trend in all-items and core inflation over the last 12 months, showing the troubling rise in annual all-items inflation, even as core inflation inches lower. A lot of this was caused by rising gas prices:
What this means for future interest rates
We can conclude that the Fed is on “hold” for now and short-term interest rates will continue (for months) in the range of about 5.3% until we see some evidence that inflation is actually abating. I am noticing that today’s inflation report has had an immediate effect on real yields, with the yield on a 5-year TIPS popping to 2.03%, up about 10 basis points from yesterday’s close. The 10-year is up about 7 basis points to 2.07%.
From this morning’s Bloomberg report:
Excluding housing and energy, services prices accelerated to 4.8% from a year ago, the most since April 2023, according to Bloomberg calculations. “(I)t is another reason for delaying any rate cuts and/or reducing the number expected this year,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “If service sector inflation is sticky, then it doesn’t leave much room to ease.” …
“The sound you heard there was the door slamming on a June rate cut. That’s gone,” David Kelly, JP Morgan Asset Management’s chief global strategist, said. (Video follows …)
Nevertheless, I believe the Federal Reserve would like to get a couple 25-basis-point cuts in sometime this year, which it has strongly signaled. But both the U.S. economy and labor market remain strong. Are rate cuts truly needed?
Inflation analyst Michael Ashton had this to say this morning:
I can’t see any rational argument for cutting rates in June. Actually, on the data we have in hand I can’t see an argument for cutting rates in 2024. … To cut the overnight rate, the Fed would have to rely on forecasts that inflation is going to get better. And to do that now, when forecasts have been persistently wrong (and not by just a little bit but about the whole trajectory) since 2020, would be incredibly cavalier.
What’s next?
In a few days (probably Sunday morning) I will be posting a deeper analysis of the I Bond buying equation: In April, in May or not at all? As I noted, the data appear to make an April purchase more attractive than May, to lock in the 5.27% composite rate for six months.
We won’t know the I Bond’s new fixed rate until May 1, or more probably the morning of April 30. But at this point, I would guess, the fixed rate will remain in the range of 1.2% to 1.3%. More on that later.
In the meantime, TIPS investments are looking attractive again as real yields rise above 2.0%.
More on I Bonds:
• Confused by I Bonds? Read my Q&A on I Bonds
• Let’s ‘try’ to clarify how an I Bond’s interest is calculated
• Inflation and I Bonds: Track the variable rate changes
• I Bonds: Here’s a simple way to track current value
• I Bond Manifesto: How this investment can work as an emergency fund
More on TIPS:
• Now is an ideal time to build a TIPS ladder
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
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David, feel free to not post this, as it is sort of long. But some of your readers might find it useful, or perhaps, a little scary. It is a recent email I received from Treasury Direct. It is why I dislike Treasury Direct and only use it to buy savings bonds (there is no other choice). A lot you can do online faster, but I have to deal with the fourth one which could not be done online. Note the processing times:
“Dear Customer,
This is a system generated email to communicate we received your Savings Bonds/Treasury Marketable Securities materials.
Cases are worked in the order they are received in our office. Your request is important to us and will receive attention as soon as possible. Please be aware of our estimated processing times to process your case which are based on the case type:
If we require additional information to process your case, we will contact you. Thank you for your patience.
Please retain the Customer Number and Case Number referenced above to streamline any future actions associated with this request. Also note, you may receive multiple email notifications and Case Numbers depending on the type of transaction(s) you have requested.
If you have additional questions, please use the Contact Us link on TreasuryDirect.gov.
We appreciate your interest in U.S. Treasury securities.
Sincerely,
Treasury Services”
I have scheduled my full 2024 I Bond purchase for the end of April, but now I’m starting to wonder if the fixed rate might go up in May. We know the 6-month inflation rate will be 1.48, and if they leave the fixed rate at 1.3, then the composite rate will be 4.28%, which sounds low by recent standards. I’m looking forward to your Sunday post, and I wish we had a crystal ball!
I *think* the fixed rate will fall into the range of 1.2% to 1.4% and I will be posting an analysis Sunday morning. However, we really don’t know. But I am confident that the Treasury does not look at the current inflation rate when it sets the fixed rate. The fixed rate is permanent and the variable rate goes away in 6 months. The Treasury looks at trends in real yields of 5- and 10-year TIPS, along with some “secret” factors.
Question – TIPS at 2% in tax deferred or I bonds at 1.3%?
When a TIPS has a 70-basis-point advantage, I would definitely say the TIPS is the preferred investment, if you could only have one. I continue to invest in both.
What about TIPS in taxable accounts? I am tempted to pickup the 5 year at auction next week. While I continue to max out I Bonds for this year (half of it this month, rest in oct or december) – I am leaning towards using the money I designated for 5 year CD towards getting a 5 year TIPS instead
TIPS in a taxable account goes against the conventional advice, but I have done this in the past and it worked fine for me. 1) you retain the state income tax exemption, which you lose in a traditional IRA, and 2) when the TIPS matures you have prepaid the taxes and maturity is more or less a non-event. After retirement, tax-deferred is better, in my opinion. I wrote about this here: https://tipswatch.com/2021/04/02/frightened-by-a-phantom-tips-are-fine-in-a-taxable-account-until/
Thanks. I do have some 0% I bonds which I can unload and then buy the new ones at 1.3% but then I would need to pay taxes as I am still working and in the higher tax brackets.
Thank you as always for such an immediate and thorough response! I always look forward to your analyses. I’m 70, 100% fixed income (Treasuries, CDs, I-Bonds). I have 30K in I-Bonds (20K @ 0% fixed, 10K @ .40% fixed). For my age, this feels like a small amount of money in I-Bonds. Do you think it’s even worth keeping these I-Bonds at these low rates as opposed to purchasing 2- or 3-year Treasuries at higher rates? In other words, is 30K (or 40K if I purchase this year) even considered enough inflation protection for someone my age to warrant keeping low-interest I-Bonds? Thank you!
This is impossible to answer because this is a personal decision, but the key is if you think this is a shorter-term investment. You are 70, so you still probably have a longish time to live. If you want to lock up money for the short term, you could look at redeeming the 0.0% I Bonds and putting the money into a safe nominal investment like a Treasury or bank CD. But you will owe taxes on the interest earned, and probably the three-month interest penalty. I think the way to look at the I Bonds is as a tax-deferred, cash-equivalent account that after 5 years you can draw on with no penalty except the taxes due.
Thank you for answering my question so quickly and sharing your thoughts about this quandary. It helps me put things in perspective! I did have 20K in I-Bonds in a sole proprietorship account, but I redeemed those in January because since we can’t assign beneficiaries to those accounts, I realized the amount of hassle my kids would have to go through to get the funds isn’t worth it to me. On a side note, Bogleheads have been sharing that it’s taking up to six months for TD to transfer I-Bond funds (in regular TD I-Bond accounts) to beneficiaries. Do you think of that as a significant negative for I-Bonds? I’m trying to simplify everything for my kids, one of whom is executor of my estate. Thank you!
Reader, yes, I hate that TreasuryDirect has onerous procedures, but on the positive side it would discourage fraudsters. My wife will be executor for her mother’s estate, and mom has holdings at TreasuryDirect. I am sure this will be a time-consuming process.
I also have investments in nominal T-bills and some shorter-term notes and CDs. It sounds like that is they way you’d like to go. You could consider TIPS in a tax-deferred brokerage account if that is an option.
I’m having a hard time really understanding TIPS, even though I have a gut feeling it would be in my best interest to invest in those, but I feel more comfortable with T-bills and notes and CDs and I-Bonds. I’ve been using New Retirement software for financial planning, and it indicates that my long-term portfolio looks very good with the choices I’ve made so far. I’m super duper risk-averse! Thanks again!
TIPS are a complicated investment, especially if you try to *really* understand what you are earning. Most financial advisers have only passing knowledge of TIPS and will usually recommend a TIPS fund. But if you are buying and holding to maturity, there is practically zero risk and at maturity, you will get paid an inflation-adjusted amount.
David: I think a good simile for TIPS and iBonds is an insurance policy. One does _not_ buy insurance as an instrument with the intention of making a profit in itself.
The idea of I bonds and Tips is to cover yourself in case that inflation comes back. Those who simply compare the interest rate of a CD or T-Bills are, respectfully, missing the point.
Not ALL of your portfolio or investments should be in TIPS and or I bonds. (and I do not see anyone advocating for that either).
Inflation will come back, maybe not in the short term, but perhaps sooner than what most expect.
Rodolfo, excellent points. It’s good to be reminded about the reason we invest in inflation protection — not to get rich, but to preserve buying power. When you buy home insurance, do you cheer if your house catches fire? Of course not. That is why I never cheer for higher inflation, even though I insure against it.
Personally, I think I would prefer a 5.10% 1-year CD, a 5.00% 18-month CD or even a 4.35% 5-year CD to I-Bonds purchased in either April or May, especially with money I probably won’t want in I-Bonds if inflation declines over the next 5 years, as expected.
Yes, if you want a short-term investment, go with a nominal Treasury or CD. If you want inflation protection for the longer term, go with I Bonds and/or TIPS. The point of inflation protection is … we have no idea where inflation is heading.
I already scheduled a purchase at the end of April, because I can’t imagine that the fixed rate will go higher. If it does, will put some in a gift box. On the fence about whether to dump my 0.4% I-bonds, but will at least wait until the combined interest rate is below 4% for three months.
David – Last year I split my I bond purchases between April and May and it worked out for the May purchases. This year I am leaning towards buying all in April but I haven’t decided yet. Do you think you will be writing about the fixed rate anymore before May 1? Thank you.
I just dumped all of my I-bonds after trying to deal with a password reset. The agent on the other end went through an endless list of questions, including things I could only answer by having access to my account! It really ticked me off. <roll eyes>. LOL!
I figured there are easier places to keep my money… maybe a bond ETF, maybe paying down a bit of debt. YMMV.
Still love this site and forum!
Thanks.
Been there, done that: trying to figure out what my “dream vacation” was (answer to security question) when I opened my account 20+ years ago! So long ago that I couldn’t remember where I would have written it down… The kind agent gave me a couple of hints and I got it.
Getting the guaranteed six months at 5.27% is nice, but the 1% drop for the following six months is not as appetizing for me today. I am going to hold out in hopes of a higher fixed rate. The current fixed rate surprised to the upside and I am going to take a chance on the new fixed rate being higher. Between now and October 2024 I can keep my money in short term treasuries, if the new fixed rate is the same, then I have not lost much opportunity, and I did not loose interest because the short term treasuries are as good as the current IBond composite.
I like the current fixed rate and too often I have waited when I should have taken action, can’t teach an old dog new tricks.
I think a lot of us are facing the same dilemma. With short-term treasuries currently paying around the same as the current I Bond composite rate and an inflation trend indicating the May fixed rate may remain 1.3% and the Fed may not cut rates as soon as previously anticipated, one could consider waiting an additional 6 months before re-evaluating the situation.
Whether one buys I Bonds in April, May, or Oct, they’ll still eventually be subject to the new 2.96% variable rate. But by waiting, it’s likely short-term govt. paper will continue to hover around 5.2%+ for the foreseeable future and there remains a possibility that the November I-Bond rates could advertise a higher fixed rate, a higher variable rate, or both. That would allow for the possibility of avoiding the 2.96% variable rate altogether while the cash put aside for an I Bond purchase wouldn’t lose much, if any, interest (albeit it taxable interest). The only other small downside to waiting is starting the 5-year clock on penalty-free redemption 6 months later.
I was doing similar math to this.as well. I decided that if Novmeber is better (and it may very well be), could at least get those on my 2025 purchase.
Why do you think November will be a a lot better? I assume you mean the fixed rate. That is a long time to wait for buying for 2024.
I do the same, and, unfortunately, very hard for me to learn new tricks.
Agreed with all of the above for all of the same reasons. Already have a chunk of the 1.3 FR. Waiting for November.
Looking forward to your analysis on the upcoming 5 Year TIPS auction which opens April 11th.
I will be posting that preview article on Sunday morning, April 14.
Yesterday, I did some noodling to average January and February to guess that March MoM would come in about 0.6%. A reading of 0.65% means inflation is on an upswing, not just following a general trend of the first couple months of this year. That is a troubling sign for the war on inflation. For I-Bond purchasers, the big question is going to be the fixed rate. since there is a small chance it may be lower to 1.2% in May. We should buy in April. However, if the fixed rate remains 1.3% in May, we should not be surprised. Whereas May fixed rates were 58% changes vs. 42% no change, November is more likely to see changes, 72% vs. 28% no change.
Thanks Jim. Predicting the fixed rate is always difficult, so we can only say what the Treasury *should do.* And then, every so often, it does something weird.
With the variable rate going down and fixed rate trending towards staying the same or going down slightly, this seems like the first no-brainer buy vs. wait decision in a while.