Picking up Nickels

Friday, September 15, 2006

Series I Savings Bonds Watch: August CPI-U numbers released

The U.S. Bureau of Labor Statistics released the August 2006 Consumer Price Index (CPI-U) inflation data this morning. It increased by 0.2% last month, indicating that inflation is under control (Key inflation gauge tiptoes higher).

Although this number can impact interest rates as well as the stock and bond markets, let's see what this means for Series I savings bonds (I Bonds). As I mentioned earlier (Should You Sell Those Savings Bonds?), the variable interest rate portion of I Bonds is determined by the semiannual CPI-U rate. Now that the August 2006 CPI-U data is out, we only need the September 2006 CPI-U data (to be released on October 18th) to determine the initial variable interest rate for I Bonds issued on November 1, 2006.

I watch the CPI-U data on a monthly basis, which I use to help me decide if I want to buy I Bonds. In my opinion, the ideal time to buy I Bonds is in late April and late October, after the previous month's CPI-U numbers have been released. This allows you to know the rate of return for your I Bonds for both the first and second six month periods, which is important since you must hold I Bonds for 12 months before they can be redeemed.

As an example, let's assume that the September 2006 CPI-U number remained unchanged from the August 2006 number released today. Using the CPI-U data from March 2006 (199.8) and August 2006 (203.9) (courtesy of www.inflationdata.com), we can calculate the initial variable rate for the November 2006 issue I Bonds:



For this example, let's also assume that the fixed rate for the November 2006 issue I Bond remains at the current value of 1.40%. That would mean these bonds would earn a rate of 5.50% (1.40% fixed + 4.10% variable) until the variable rate is reset in 6 months.

I will be doing this calculation for real when the September 2006 CPI-U numbers are released next month. Of course, I will not be buying any I Bonds before November 2006 since they would only earn 2.41% (1.40% fixed + 1.01 variable) for the first 6 months. I can get a much better return during those 6 months with a high yield money market account, T-Bills, or CDs.

Similarly, I will make my next I Bond buy decision in late April 2007. Once the March 2007 CPI-U numbers are released, I can perform the same calculation as above using the September 2006 and March 2007 CPI-U numbers:


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