Ibond Semiannual Inflation Rate

jamesstewart | Apr 13, 2021 | 64 posts since 2011

How is this calculated? I went to the CPI site and looked at the table of CPI-U, US CITY AVERAGE, ALL ITEMS for April 2020-Sept 2020 and see these one month percent change numbers:

-.7, 0, .5, .5, .3, .1 which add up to .7%. However, the semiannual inflation rate for the Nov-Apr 2020 issue of Ibonds is stated at .84%.at Treasury Direct's site. Can someone point out how this number is calculated and where the data source is?

I would like to calculate the inflation portion for the newest issue in May. Thanks!

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Answers

alan1 | Apr 13, 2021 | 877 posts since 2015

from Treasury Direct website, re computation of semiannual inflation rate for I bonds issued from November 2020 through April 2021:

I Bond Composite Rate of 1.68% includes a Fixed Rate of 0.00%

The composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate. The 1.68% composite rate for I bonds bought from November 2020 through April 2021 applies for the first six months after the issue date. The composite rate combines a 0.00% fixed rate of return with the 1.68% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 258.115 in March 2020 to 260.280 in September 2020, a six-month change of 0.84%.
(bold in original)

Source: "Fiscal Service Announces New Savings Bonds Rates, Series I to Earn 1.68%, Series EE to Earn 0.10%", November 2, 2020
https://www.treasurydirect.gov/news/pressroom/currentibondratespr.htm

The Bureau of the Fiscal Service is concerned about the increase over the relevant period; it has no reason to add and subtract an agglomeration of monthly increases and decreases over any period, relevant or not.

jamesstewart | Apr 13, 2021 | 64 posts since 2011

Thank you, alan1. Looks like the Ibond May 2021 issue calc will be 264.877 - 260.280= 1.766 semiannual which makes it a whopping 3.53%.

alan1 | Apr 13, 2021 | 877 posts since 2015

Why are you doubling the semiannual increase in the inflation component? The inflation component will only be in effect for a six-month period. For purchases made before May, the initial inflation component is based on a different period. For purchases in May, the subsequent inflation component will be based on a different period.

jamesstewart | Apr 13, 2021 | 64 posts since 2011

I have been buying Ibonds for years and understand how they work. When I buy a CD I always look at the APR, whether 6 month or 5 year term. Same with the Ibonds. A six month run with an APY of 3.53% after a six month run of APY 1.68% is a good deal for purchasing before May 1. I know about the 3 month penalty cashing in before 5 years if I need to factor that in..

alan1 | Apr 13, 2021 | 877 posts since 2015

Thanks for the reply. It's not the way I approach it, but it obviously works for you

And thanks for your thoughts re purchasing I bonds before May. I think I'll wait until May before purchasing I bonds -- there's a possibility that the fixed component will increase and, in my opinion, a fair chance that the subsequent inflation component will be higher than the current inflation component of 0.84%. But I can see the argument for locking in before May.

Choice | Apr 13, 2021 | 937 posts since 2020

Current inflation factor is based on 6 months of data but annualized/doubled for a current 1.68apy with north of 3%apy for May 1st issue date...and 6 months thereafter

GreenDream | Apr 15, 2021 | 358 posts since 2019

The thing with buying at the end of Apr or the End of Oct is the knowledge you can use in your purchase decision. You pretty much know what you're getting for the next year at that point (the only wild card being the fixed component, and with the fed stuck at zero, I'm not holding much hope that it will be anything other than zero). When You buy in May Or Nov, you only know what you're getting for the next 6 months.

I tend to buy my ibonds at the end of Apr/Oct for that very reason. YMMV, obviously. Just remember one doesn't need to spend all 10K of allowable purchase at any one time. So, for example, I could buy a few K in Apr, a few more K in May if the fixed component jumps up unexpectedly (or wait until Oct if I so choose) and repeat the process in Oct/Nov if I wish.

GH1 | Apr 16, 2021 | 1,055 posts since 2017

Yes pressure is on the upward trend. I need to understand these bonds though

alan1 | Apr 13, 2021 | 877 posts since 2015

Ken Tumin has just posted an article, "April Series I Savings Bonds - Better Than CDs Due To Inflation Spike".

https://www.depositaccounts.com/blog/inflation-treasury-series-i-savings-bonds/

GreenDream | Apr 15, 2021 | 358 posts since 2019

Why are you doubling the semiannual increase in the inflation component?

Um you do realize the 1.68% composite rate in your Treasury Direct quotes is similarly a double for the 0.84% semiannual rate for November 2020 through April 2021 period? as such 3.53% (or 3.54% by Ken's calculation), which assumes fixed remains 0, is an appropriate comparator to the 1.68% headline number you quoted.

source for the 0.84% and 1.68% numbers before the high horse comes trotting out:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
"The composite rate for I bonds issued from November 2020 through April 2021, is 1.68%
…
Semiannual inflation rate 0.84%"

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