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CPI Up More than Expected - Impact to Savings Accounts and I Bonds


The Labor Department reported today that the Consumer Price Index (CPI) rose 0.7% last month which was larger than the 0.5% increase most economists had been expecting. However, 70% of this increase was due to higher energy costs. The core rate which excludes energy and food was 0.2% which was in line with expectations.

Impact to Savings Account Rates

Many analysts are predicting the Fed will raise the Fed Funds rate at its meetings in March and May. The rate hikes are expected to end after that.

With today's news, rate hikes in March and May look likely. If these conditions continue, perhaps HSBC will keep its Online Savings account rate at 4.80% past April. I doubt ING Direct will keep its 4.75% promo. However, I would expect the standard rate would finally make it above 4%. If EmigrantDirect wants to keep its title as America's highest savings account rate, it should be looking towards an increase to 5%. Perhaps Emigrant will surprise us in March.

Impact to Series I US Savings Bonds

Even with the 0.7% gain in the CPI-U in January, the current CPI-U level (198.3) is still under what it was in September 2005 (198.8). This is important to those who invest in I Bonds since the inflation component is based on the difference between the March and September CPI-U levels. The March index will be announced on April 19. If this isn't over September's level, than the I Bond inflation component announced in May will be negative. Those who purchased I Bonds in November could see their 6.73% returns that they're receiving now fall to below 1%.

However, it's probably unlikely that CPI-U will be flat in February and March. If February and March match January in the gain to the CPI-U, this would result in a March CPI-U level of 201.9 and would result in the inflation component of the I Bonds issued starting May 1st to be about 3.12%. If the fixed rate component remains the same at 1.0%, the combined interest rate would be about 4.12%.

I think it's unlikely that the fixed rate will remain at 1.0% in May. The lower the inflation component, the better chance at a higher fixed rate component. Since the Treasury lowered the fixed rate last November (1.2% to 1.0%) to counteract the very high inflation component, I hope (and anticipate) that it'll do the opposite in May.

If the inflation component is 2% or less, I think there's a good chance that the fixed rate component will be increaed to 2%. If the inflation component is around 3%, I think it's likely that the fixed rate will increase to at least 1.5%. Without a rise in the fixed rate, I Bonds will look very unattractive compared to savings accounts which may be near 5% by May. For those considering I Bonds for the long term, I would recommend keeping your cash in HSBC's 4.80% savings account and waiting for the new I Bond rates to come out in May.

For more info on I Bonds, please refer to this previous post.