Inflation spikes after Iran war begins: March CPI report
In the midst of the Iran war, consumer prices soared in March due to soaring gasoline prices and fluctuations in food prices.
Savers spooked by the recent stock market downturn and soaring inflation may want to take a look at I Bonds.
Anyone who drives past a gas station will see prices skyrocketing, and depending on how the Iran war unfolds, inflation could even heat up. On February 28, the United States and Israel launched an unexpected wide-ranging airstrike against Iran.
The “I” in Series I savings bonds stands for inflation. The idea is to use an I Bond to protect your savings from inflation. The overall interest rate on an I bond may rise or fall every six months after you purchase the bond, based on changes in inflation.
I-Bonds can be used partly as emergency savings and partly as a conservative holding for investors who want to protect a portion of their portfolio from dramatic stock market declines.
Inflation rate reached highest level in two years
For months, I’ve heard savers say they’re more likely to let go of the high-yield I bonds they bought years ago than buy new bonds. After all, inflation has fallen significantly since peaking at a 40-year high of 9.1% in June 2022.
And that story probably would have continued if not for the latest inflation shock.
However, given the recent spike in inflation, savers may still reconsider selling these I bonds. And if you perhaps need to release some I bonds to cover the bills, you should be especially careful to make sure you are releasing the right bonds.
“People were definitely losing interest in I bonds,” said David Enna, who founded Tipswatch.com and regularly tracks government bonds adjusted for inflation.
All that has changed in recent weeks as inflation accelerated.
On Friday, April 10th, we got our first glimpse of the latest inflation picture when the U.S. Bureau of Labor Statistics released its Consumer Price Index for March.
Over the past 12 months, consumer prices have risen quite sharply to 3.3%. In contrast, CPI rose 2.4% in February compared to the same month last year.
Gasoline prices in March rose 18.9% over the past 12 months. Fuel oil prices rose 44.2% year-on-year, according to details in a U.S. Bureau of Labor Statistics report released on April 10.
Gasoline prices rose 21.2% from the previous month.
This sudden spike in inflation and concerns about future price increases for all types of goods will likely give inflation-linked U.S. savings bonds a bit of a boost in the near term.
Enna says if you buy an I Bond between May and October, you’re talking about an estimated annual interest rate of 4.26% that applies for the first six months.
All I-bonds will benefit from inflation-related interest rate changes in the coming months.
For example, in 2022, I-bond interest rates skyrocketed, causing so much excitement that the TreasuryDirect.gov website even experienced intermittent slowdowns during a last-minute rush to buy I-bonds at that time.
The annual interest rate for I bonds purchased from November 2022 to April 2023 was 6.89%. This interest rate applies for the first six months after purchasing the Series I Savings Bond. The same bond with a fixed rate of 0.4% now has a six-month annualized rate of 3.53%.
Those who follow I bonds like Ena know that the March CPI, typically released in April, is an important piece of the puzzle in estimating the new interest rate that will apply to I bonds purchased between May and October.
“March inflation marks the end of a six-month series that resets floating interest rates on I-bonds on May 1,” Enna wrote recently. He noted that the new I-bond rates starting in May will be based on non-seasonally adjusted inflation rates from October 2025 to March 2026.
New interest rates for savings bonds are announced on May 1st and November 1st of each year.
Reasons why bond interest rates are on the rise
There are two components to an I-bond. A fixed interest rate over the 30-year life of the savings bond, and a variable interest rate that adjusts every six months after you purchase the I-Bond. If you purchase an I Bond in June, the floating rate will adjust in December.
Before the Iran war began in late February, Enna didn’t have high expectations for I-bond rates. In fact, he expected interest rates on I bonds to drop considerably.
Before the Iran war, Enna said he would have confidently told savers that the floating interest rate on I-bonds was likely to fall to about 2% on May 1 from the current 3.12%. This variable interest rate is important to anyone who owns an I bond, regardless of when it was purchased.
Then, again before the war, the Treasury would likely tinker with fixed interest rates, perhaps lowering them to 0.8% from the current 0.9%, he said. This fixed rate applies for the remaining term of the 30-year bond.
Anna said if these estimates hold true, the overall interest rate on I bonds issued between May and October would be around 2.81%, down from the current 4.03%.
“After the war broke out, real yields recovered quite a bit,” Enna said.
“Inflation was obviously very high. That drove up all these numbers.”
Enna now predicts that the new inflation-adjusted floating rate for the I Bond will be 3.34%, up from the current 3.12%. For I bonds purchased between May and October, he expected the overall interest rate to be 4.26% if the fixed rate remained at 0.9%, and he still expects that to be the case. The fixed interest rate is the same as that of I bonds purchased from November 2025 to April 2026.
All I-Bonds ultimately carry a variable interest rate of 3.34% per annum for six months. When the new floating rate starts for individual savers depends on the first month the bond was purchased. Please note that after purchasing an I Bond, the inflation rate will be adjusted every six months.
“Everyone wants to get their hands on an i-bond now. The question is when?” Enna said.
Enna argues that many people underestimate how effective I Bonds can be for part of your savings, especially your emergency savings.
“That cash is there, ready to spend, but always rising with inflation. It’s a very safe investment,” Enna said.
How do I buy I-Bonds?
Each year, savers can put up to $10,000 each into an electronic I Bond that is purchased and maintained on a federal government website called TreasuryDirect.gov.
Therefore, I-Bond enthusiasts try to determine the best time of the year to purchase I-Bonds. They often argue over whether fixed interest rates will go up or down when interest rates are announced on May 1st or November 1st.
According to Enna, it’s usually wise to buy I bonds later in the month. For example, if you buy an I bond on April 20th, you will earn interest for the entire month of April.
In contrast, it’s often best to sell during the first few days of the month. For example, if you redeem your I-Bond on April 20th, you will lose all the interest you paid in April.
Looking ahead, Enna said he expects the I-bond rate announced on November 1 to be a fixed rate higher than 0.9%, possibly in the 1% or slightly higher range.
It’s hard to know how much inflation will heat up
Mr Ena said it would be interesting to watch inflation trends over the next six months.
“We are entering a new era of inflation. It’s hard to predict and hard to know where it’s going,” Ena said. He acknowledged that he has always had trouble predicting inflation.
But now it’s clear that inflation is back in the spotlight.
“Inflation is high and will accelerate this year as the Iran war increases energy and other prices,” Mark Zandi, chief economist at Moody’s Analytics, told USA Today Network’s Detroit Free Press.
Zandi said inflation, as measured by the Personal Consumption Expenditure Price Index, is currently near 3% and will approach 4% in the second half of this year. The Fed’s inflation target is 2%.
Zandi expects inflation to rise thanks to higher energy prices, the continued impact of higher tariffs, and the expansion of AI, which many expect will initially contribute to inflation.
As for I-bonds, you still have a short window to buy them in April, for example around April 28th, before the new interest rates take effect.
Enna said investors who bought I-Bonds in April would see a six-month annualized return of 4.03%, followed by a six-month annualized return of 4.26%. In that case, he said, he could end up receiving an estimated 4.16% over 12 months.
However, keep in mind that the fixed interest rate on the I Bond may reset on May 1st and we won’t know until the Treasury makes an official announcement.
I Things to consider when selling bonds
However, if you are considering selling an I bond, check the interest rate you are receiving on that particular bond.
Paying attention to the fixed interest rate of I Bonds is something that novice savers don’t realize is important. After all, who would imagine that you would need a very detailed chart to explain which fixed rate applied to which batch of I-bonds issued at any given time? However, such charts exist online.
Oddly enough, I Bonds can carry any type of fixed interest rate over a 30-year bond life, depending on when you buy them. And the chart certainly spells it out in very small print.
Issued in September 1998, the 1st Series I Notes continue to carry a fixed interest rate of 3.4%. I-Bonds purchased from May 2000 to October 2000 have a fixed rate of 3.6%, which is the highest fixed rate ever offered for an I-Bond.
On the contrary, there is a long list of I-bonds issued in various years with a fixed interest rate of 0%.
For example, a fixed rate of 0% applies to the long term of I-bonds purchased from May 2020 to October 2022. In this case, you will only receive variable inflation for a specific six-month period.
In contrast, I bonds issued between November 2023 and October 2024 had a fixed interest rate of 1.3%.
Ideally, if you plan to cash out some of your I-bonds, you might consider selling the batch at a fixed rate of 0% and holding on to something that will continue to pay a fixed rate of interest no matter where inflation goes.
If you sell your I Bond before you have held it for five years, there will be a small penalty charge.
If you cash out your I Bond within five years, you lose the last three months of interest. The TreasuryDirect.gov site provides an example: “If you cash out your bond after 18 months, you’ll earn the first 15 months of interest.”
After five years, the interest penalty will disappear and the loan can be redeemed at any time, Enna said.
Cashing out a savings bond means that most people must report all the interest earned on the bond over time in the year they cash out the bond. For those converting large amounts of bonds into cash, consulting with a tax professional first to review your tax situation may be key.
“You will have to pay taxes when you redeem your money,” Enna said.
Enna personally sells her 0% fixed rate I-Bonds and reinvests them into higher fixed rate I-Bonds.
“There’s nothing left of them, but there are some 0.1% and 0.2% versions that could be rolled over,” he said.
The threat of inflation remains real, especially given the presence of petroleum derivatives in everything from medical equipment to textiles to furniture. And sure enough, we’ve been ordering quite a bit online lately and getting almost everything delivered. This can lead to all sorts of price increases.
Inflation causes pain on so many levels. But i-bonds could have a new lease of life as savers can get some protection from inflation.
Contact personal finance columnist Susan Tompol: stompor@freepress.com. follow himr X @tompor.
