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CPI Numbers Runs Hot

Ugly numbers reign as year over year consumer prices rose by 8.3% compared to an expectation of 8%. Most certainly this makes the 75 basis point increase in the Fed Funds rate later this month a certainty.

The S&P500 dropped by about 2% on the announcement. The 10 year treasury yield jumped by 12 basis points–ugly.

This news was not needed–but we play the hand we are dealt.

27 thoughts on “CPI Numbers Runs Hot”

  1. I know this is going to make people mad but I love it, I am getting US government backed agency debt at 5.5%, CD’s at 4%, I Bonds at 9.6%. As a retiree I don’t spend much (food, travel and entertainment) but I have had a huge increase in income – keep raising those rates! (I know very selfish)

    Note on I Bonds – If you have businesses you can buy I Bonds in those business’ to exceed the 10k personal limitation.

    1. Sometimes I try to think the same way, Todd, but just can’t get there from here… To me, when my income is rising but my total net worth and/or purchasing power is not, or even worse, it’s declining, all I can think is I’m going to be paying more in taxes than I did before on a lower total financial asset base….

      1. 2whiteroses: agree, if inflation is 8% and our investments are paying us 5% we are losing but this is an opportunity to lock in some higher paying stocks while assuming inflation will recede at some point in the next couple of years.

    2. Todd, what do you think the chances are that the US govt agency debt (GSE) will be called if interest rates come down?

    3. Todd: As great as that makes you feel, the only investment you have that is keeping place with inflation are the I-Bonds, and they are taxable on the Federal level, so you really aren’t breaking even.
      As for the Agency bonds (I also have some at 5.48%, due 2042) and CDs, both of which are taxable, putting you back more than you imagine.
      As an investor in marketable securities, the only way I see to safely keep up is to find companies that pay increasing dividends over time. Plus the dividends will be QDI and taxed as capital gains (which is 0% if your income is modest) unless the company is a Business Development company or MLP. Also, long term bonds carry sizable risk is inflation takes off.

  2. Month-over-month inflation in July was 0.0%, and in August it was 0.1%. That is an average of 0.05% month-over-month for two months. My math tells me that if (HUGE “IF”) the same month-over-month inflation goes on for the next 10 months, then the annual inflation rate would be 0.6%. To me, the current numbers look good. What am I missing?

    1. King N, I agree. Once the prior year numbers reflect the almost overnight inflation surge, the whole inflation number will crash. November or December, hope the fed doesn’t over do it.

    2. I guess it would be fine if we weren’t 8+% higher than last year already, and that is a government figure you could double and be pretty close to the truth.
      Most of the things I buy are much more than 8% higher than last year. Food, gasoline, utilities, airline tickets, hotels are closer to 25% more than I paid last year. I expect a full 100 basis point raise next week, we’ll see soon.

  3. has anyone calculated where we are on ibonds
    the November adjustment has 1 more data point to go


    1. If I am doing correctly, if the cpi does not change, we will have i-bonds at 6.03% ( computed as 2*(296.171/287.504-1) ). Can someone double check?

      So if you currently have i-bonds paying 9.62%, and then will get at least 6% for the next 6 months, you would be making a nice >7%/year, risk-free, state-tax-free, tax deferred profit.

      Todd: in addition to business, you can also buy $10k/year for each trust you may have.

      1. Please forgive me or ignore me if you like, but I must correct the mistaken belief that you can profit from I-Bonds. By design, they will only match CPI-U inflation. So if you put $1 in today, you will get $1 out (in purchasing power) in 5 years. Redeem sooner and you lose money. Because they just track inflation (as reported) there is no profit, no gain. It may seem like you’re really making money, but it’s a zero sum, because you’re paying more for your lifestyle due to astronomical inflation.

        Yes, they are compounded semi-annually, so there may be a small benefit from compound interest, but with low purchase limits, it’s unlikely to accumulate any appreciable amount.

        Worsening the situation, the fixed rate component of I-Bond interest is stuck at 0.0%, so when inflation returns to normal, your returns will be back to 2-3% annually, again, just tracking inflation. If they raise the fixed rate on November 1, then I-Bonds will look like an investment, not a break-even proposition.

        1. I dont think that way. If ibonds pay more than other comparable fixed income then it’s a good buy. Whether it beats Inflation or not it’s better to buy them than to not buy them and lose even more value on your money. My goal is to earn whatever I can, not beat some arbitrary benchmark,

          1. Risk is additional factor.

            Risk-adjusted, I-Bonds are probably the current best deal on the planet.

        2. >> I must correct the mistaken belief that you can profit from I-Bonds. By design, they will only match CPI-U inflation. So if you put $1 in today, you will get $1 out (in purchasing power) in 5 years. Redeem sooner and you lose money.

          I don’t see it that way. My take is that the point of an I-bond is to keep up with inflation so if they pay 9% and inflation is 9% then you’re not spending down your nest egg. And if inflation drops, so to will the I-bond’s yield.

          And when “when inflation returns to normal (2-3% annually)”, you can cash them in and pay 3 months in penalty at that lower rate. That’s not bad if you’ve been collecting 6 – 9 pct (or even more) for years.

        3. You have to remember what CPI-U is… its just tracking what the average urban person spends. And since no one is exactly average its just a generalized gauge.

          I’m getting 9.62% on ibonds right now. Actually 10k (out of 30k) of them haven’t even gotten to that rate yet, so I have 6 months at that rate. I can promise you my actually rate of inflation is much lower than that. Just by being in a fixed rate mortgage, since refinancing my cost of shelter has gone down, not up. A first time homebuyer is screwed. Likewise, used vehicles have skyrocketed in prices, but I own a vehicle. So if I sell it and buy used I’ve broken even. Someone just starting out and buying a vehicle is screwed.

          In fact right now, my only point of pain is food prices. My energy bills have barely budged, gasoline is higher than 2020 sure, but compared to 2019 my gas bill is only $20 or $30 higher a month.

          So indeed yes, I’m making a “profit” on I-bonds.

        4. Bruce – Do you include a rainy day fund in your investment plan? That safe portion of your assets that you consider untouchable except in case of emergency or unexpected loss? In my world, that equivalent of Tim’s sock drawer investments is populated with ultra safe, never lose type investments like CDs, Treasury bills, savings accounts, etc. If you have such a rainy day fund, it’s awfully difficult to find a never goes down in value, keeps up with inflation, presently earning better than IBonds and their 9.62% yield presently. In this environment I’m happy to set aside a portion of my Safety Joe funds in an investment that merely guarantees to keep up with inflation even if it’s not an after taxes guarantee.

          1. 2WR, It seems like a lifetime ago, but we were buying IBonds last year around this time locking in the 3.56% before the 7.12% thinking that was great, ha. Heck these bonds still havent started paying the 9.62% yet let alone the coming cycle. The ones we bought this year are for now are earning more money than the older ones. I will have to decide in January whether to buy more or roll off a gift purchase. Probably will do the latter since 2 year debt is over 5% now.

          2. Yes, 2wr, we have some cash on hand in a safe place and a floor of $35k in our credit union checking acct. For these emergency funds, the primary goal is accessibility, hence, the stash on hand or CU with unlimited ATM withdrawals. Our cash in other accounts, be they CU, brokerage or retirement is kept very low right now to reduce losses to inflation.

            I hear about people going all in on I-Bonds through various “side-schemes” (Trusts, business or gift accounts) and it makes me think they may be over-allocating because they see a good investment potential. For me, with liquidity restrictions, early redemption penalties, purchase limits, and no alpha, I-Bonds don’t seem that good, but I’m repeating myself.

            Last October I invested in a multi-family apartment complex syndication which pays an 8% pref and will likely provide inflation-beating returns. Many of my preferreds or DGI stocks are paying >9% current yield with some potential for price appreciation. Maybe I grew my risk tolerance, but I knew when the Fed cut rates to near-zero that a new approach was called for. IMO, rather than over-allocating to I-Bonds, genuine inflation-beating returns may be found at slightly higher risk. I manage risk by keeping my exposure low enough that a total loss wouldn’t devastate me. Even during COVID lockdown, my real estate income was unabated and my DGI income dropped by only 12%.

            This has been a good discussion, with many people making good points. The original mention of “profit” on I-Bonds is what caught my attention, and I see now that others value the low risk and capital preservation aspects.

            I apologize if I sound like I’m bragging. I’m sincerely interested in helping people find alternatives to conventional investments in order to achieve true diversification and reliable income.

            1. Good discussion for sure… thanks for contributing…. I certainly agree about over allotting to IBonds. I’ve not done any of the hoop jumping to add more thru trusts, ultra gift giving, etc… I did gift my wife her next year’s allotment but when TreasDirect wouldn’t let me have her gift me the same, I just dropped the idea rather than spend time finding out why.

              But as far as early redemption penalties, if you have other Safety Joe investments as well to go to first, the penalties most likely won’t be severe if you’re wanting to get out because of changed inflation assumptions… Just wait out the first 3 months of bad numbers and the amount you’re penalized will be very small if any….

              I too had the opportunity to do a private multi-family type investment complex about the same time you did yours…. it was the first time I really began to understand why that kind of real estate investing can be so profitable under almost any circumstance…. I wanted to invest but it didnt get a positive Spousal Approval rating, so I passed – too long a locked in illiquid time period for an old man… hey you have to pick your battles… lol

              1. 2wr, you make two good points about liquidity- one for I-Bonds and one for RE. I choose RE for diversification, income and advantages of RE (appreciation, amortization, depreciation, fixed-rate loan leverage, tax deductions) and will sacrifice liquidity to achieve that. Although you well describe how penalties may be reduced, if I’m going to sacrifice liquidity on I-Bonds, having a fixed-rate component will help me accept that. If they move off zero fixed-rate in November, I’ll be in.

      2. I agree with your calculation of 6.03%. However, that does not reflect fixed interest rate component. As I wrote a few months ago, I am expecting a fixed rate to be announced November 1st. There is no formula for fixed rate but looking back in history when we had fixed rate component, fed funds rate was similar to new expected fed funds rate (about 3.25%). Therefore, I am predicting a 1% fixed rate. Ibond would be 7% effective November 1st.

        1. USC CPA,
          Interesting points regarding future fixed rates of i-bonds.

          I believe the discussions above refer to the reset rate of already bought i-bonds. Indeed, if they raise the fixed rate, then only new purchases will include it, so for already bought i-bonds we probably will see something around 6%, regardless of what the new fixed part will be.

          I wonder what a fixed rate of >3% in i-bonds will do to III investors….


    1. xerty–I heard that–not good news, but they have to get this inflation under control.

      1. Just one man’s opinion. We have a global economy. Much more than we had in the 1980’s. Inflation is a worldwide problem. The Fed continues to operate as if they can control a world wide problem with US interest rates. I am skeptical. Yes, the Fed needs to continue to increase rates but they also need to start getting more realistic. Getting back down to 2% inflation will cripple the US economy because to do that means a severe recession. They need to get to 3% – 4% and reevaluate. Measured steps, recognizing the world has changed. I don’t expect anybody to comment. I may be one of the few in America who thinks this way.

        Short term they need to continue to do what they are doing.

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