Record hike in gas prices fuels U.S. consumer inflation in March
Consumer prices rose sharply in March for the first time in about four years as crude oil prices soared due to the war with Iran and tariffs continued to be passed on.
Inflation is rising again, which means interest rates on I-bonds are rising as well.
The latest I-bond, currently on sale until October 31, has a yield of 4.26%, up from 4.03% over the past six months. I-bond interest rates change every six months based on inflation. Interest rates include fixed interest rates and variable interest rates. Fixed interest rates remain the same for the life of the bond, while variable interest rates change every six months based on the Consumer Price Index. The latest I-bond interest rate of 4.26% consists of a fixed rate of 0.9% and a variable rate of 1.67%.
The 4.26% rate is not as high as the 9.62% offered by the Treasury in 2022, when inflation hit a 40-year high and triggered a panic buying of I bonds, but it is competitive with some of the highest rates on certificates of deposit (CDs). And if inflation continues to rise, it could rise further. Many economists predict that the rise in oil prices caused by the Iran war will continue to push up gasoline prices and eventually lead to higher prices for other goods and services.
“This is very good news for I-bond investors,” wrote David Enna, founder of Tipswatch.com, which tracks Treasury Inflation-Protected Securities (TIPS) and I-bond rates.
Why should investors consider I-Bonds?
The current I-Bond interest rate of 4.26% is better than U.S. Treasury bills (T-bills), which compete with CDs, high-yield savings accounts (HYSAs), money market accounts (MMAs), money market funds (MMFs), and money market funds (MMFs), which have the highest interest rates and yield less than 4%.
In addition, because it receives support from the U.S. government, the risk is low, and the overall interest rate will never fall below 0% even during deflationary periods when the inflation rate is negative.
“The value of your investment will never decrease due to ‘market trends,'” Enna said. “It won’t make you rich, but it’s a strong investment to preserve your capital.”
I-bond interest is not subject to state or local income taxes, and holders can choose to defer federal taxes on unpaid interest for up to 30 years, or at maturity if held for that period.
What are the downsides to I-bonds?
Holders can cash out their I-bonds before maturity, but there are a few things to keep in mind.
- Must be held for at least 1 year to convert into cash
- If you redeem before the end of 5 years, you will also lose the last 3 months of interest.
- TreasuryDirect only allows individuals to purchase up to $10,000 worth per calendar year
But experts say these downsides don’t really point you in the wrong direction, as I-bonds can help savers stay ahead of inflation and supplement savings in HYSAs, MMAs and MMFs.
Because HYSAs, MMAs and MMFs are safe and provide instant access to funds, they are “useful for saving for emergency funds and short-term expenses,” said Ken Tumin, founder of DepositQuest.com, which tracks the best interest rates for savers. But it “generally hasn’t kept up with inflation.”
“Interest rates have remained high for longer than expected,” he said. “One reason for this is persistently high inflation, which shows why we need to ensure savers earn as much interest as possible to stay ahead of inflation.”
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
