Inflation has been rising, making more attractive what was formerly considered a humdrum investment: federal savings bonds.
Series I savings bonds – the I stands for “inflation”- are low-risk bonds that pay a fixed rate set for the life of the bond, plus a rate that varies based on inflation, as measured by the Consumer Price Index. The rate resets twice a year, in May and November.
The fixed rate on new I bonds has been zero for more than a year – not much to get excited about. But the annualized inflation rate is 3.54% for bonds issued from May through October.
That’s an eye-catching number, especially compared with rates on basic savings accounts and certificates of deposit insured by the Federal Deposit Insurance Corporation. The average interest rate on a savings account is 0.13%, with average rates of about 0.5% available through online banks, according to the website DepositAccounts.com.
It is true that buying an I bond now, with a zero base rate, means you may earn less if inflation falls and the bond’s variable rate falls along with it when rates reset. While no one can predict whether inflation will continue to rise, prices have been increasing as the economy rebounds from the pandemic – so hedging against further inflation may make sense.