Due to the way that the semi-annual inflation rate is calculated, it is possible to estimate the inflation-rate component of a Series I savings bond by tracking the CPI-U numbers released by the Bureau of Labor Statistics.
– The semi-annual inflation rate for May 1 to Oct. 31 is calculated by subtracting the CPI-U for March from the CPI-U for September, and dividing it by the CPI-U from September.
– The semi-annual inflation rate for Nov. 1 to April 30 is calculated by subtracting the CPI-U for September from the CPI-U for March, and dividing it by the CPI-U from March.
The CPI-U for March is announced mid-April and the CPI-U for September is announced mid-October.
What good is that information?
Since the composite rate for I bonds will change on the first day of May and November, you have roughly half a month to purchase I bonds to lock in the current composite rate while also having a good idea of the upcoming composite rate.
Here’s an example:
- The May 1, 2012 to Oct. 31, 2012 composite rate was 2.20%.
- Knowing the released September CPI-U in mid-October, you determine that the inflation component for November is 0.88%. Assuming that the fixed rate is 0%, you’d get a composite rate of at least 1.75%.
Buying I bonds during this 2-week window, means you earn the 2.20% composite rate for six months and a composite rate of at least 1.75% in the subsequent six months.
Redeeming these I bonds after 12 months, and deducting the last 3 months of interest, you’ll earn an effective rate of 1.55% APY (possibly higher if the fixed-rate component is above 0%).
You can compare that rate to the top 1-year CD rate that is currently available and invest in the option that would yield the most interest earnings.
Want to increase the effective rate that you earn on I bonds? Read on to the next step.