Rising inflation and falling deposit rates punishes savers. We have been seeing the falling deposit rates for the last three years, and this year rising inflation has been very apparent even in the government reports. You can see the rising inflation in the August CPI numbers that the Labor Department released yesterday:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.8 percent before seasonal adjustment.
Note the 3.8% increase for the year. That's high. The LA Times blog Money & Company has a good overview of August numbers:
U.S. consumer prices were up more than expected in August, lifting the year-over-year inflation rate to the highest level in three years.
The Consumer Price Index rose 0.4% in August from July, seasonally adjusted. That was double the 0.2% rise that economists had expected in a Bloomberg News survey.
It should also be noted that the core CPI, which excludes energy and food, rose 0.2% in August and 2% for the last 12 months. That's at the high end of the Fed's informal inflation target. This will make it harder for the Fed to justify QE3.
Series I Savings Bonds
One small benefit of rising inflation is that it makes Series I Savings Bonds a better deal. The next inflation component of the I bond will take effect in November, and this component will be known in mid October. The Savings Bond Advisor gave an estimate of this inflation component:
The Series I bond inflation component is based on the difference between the March and September levels of the CPI-U. If the CPI continued to increase at this rate next month, the next I bond inflation component would be 3.31%.
The current I bond inflation component is 4.60%. If you buy an I bond before November, you'll receive 6 months with an annualized yield of 4.60% (fixed rate is zero). For the second 6 months, you'll receive the next I bond inflation component. If we use the estimate of 3.31%, we can calculate the return for 12 to 15 months.
In summary, an estimate for the 1-year yield for an I bond purchased before November is around 3.40%.
Here's how one would purchase and redeem the I bond to obtain this yield:
- Purchase I bond at end of September or the end of October 2011
- Receive 6 months with yield of 4.60%
- Receive 3 to 6 months with estimated yield of 3.31%
- Lose last 3 months of interest for early redemption
- Redeem I bond early in the month to maximize short-term yield
Note, buying the I bond late in the month and redeeming it early in the month provides a slight bump-up in the short-term yield.
When I estimated the yield in May, I assumed the worst case yield for the second inflation component (zero percent). This resulted in a maximum yield of 2.51%. Please refer to my May I bond post for details about how I calculated the yields and how late in the month you can purchase a savings bonds.
The good news is that I bonds will provide a nice short-term return (estimated to be around 3.40%). The bad news is that you can only invest a maximum of $10,000 per social security number ($5K electronic and $5K paper).
Don't forget that next year you will no longer be able to buy paper savings bonds from banks.