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March CPI-U: Impact to Savings Accounts, I-Bonds


The March Consumer Price Index for All Urban Consumers (CPI-U) came out today. The core CPI increased more than what the experts had expected. This might mean the Fed won't end the rate hikes anytime soon (more at Yahoo). Perhaps we'll see savings account rates hit 5% before too long (here's one that's already at 5% non-promo).

The CPI-U ended March with a level of 199.8. That's 1 above the September 2005's level of 198.8 which results in an annual rate of 1.01%. So the I-Bond inflation component from May through October 2006 should be 1.01%. Those who bought I Bonds since November 2005 will be earning only about 2% for six months after May 1st. If you consider your first six months were at 6.73%, you'll average out to about 4.40% for the year.

With only a 1% fixed rate, the current I-Bond isn't a good deal. Hopefully, the fixed rate will be increased in May. It seems likely if the Treasury wants to keep the I Bond as an attractive investment. A 2% combined rate doesn't look good at all. I'm predicting that the fixed rate will rise to around 2%. That'll make the combined rate to be around 3% which isn't that good either when savings accounts are paying over 4%. Perhaps we'll see a fixed rate hike even bigger. However, the Treasury has never changed the fixed rate more than 1% at any one time, and the time it changed 1%, it was a drop (November 2001 it dropped from 3% to 2%). Refer to my previous post for more I Bond information and rate history.
Weiwen   |     |   Comment #1
I'm hoping they boost the fixed rate to 2%. of course, their first priority is to raise money for the government. giving a good return to investors is secondary. they might not be so generous!