I-Bonds are currently paying 4.80% interest, which is pretty good. The rate changes every 6 months though, and I just spent the last hour trying to figure out how to predict it. As I’ve mentioned in an older savings bond post, I-Bonds pay a rate based on two parts, a fixed component good for the life of the bond and a variable component based on inflation that changes every November and May 1st.
It turns out you can actually predict the variable component of the rate before it is actually announced officially. Inflation in this case is measured by the CPI-U, which is released every month by the government here. For example, the inflation information for August 2005 was just released today. The rate in May is a measure of inflation from the previous October through March; the rate announced in November is a measure of inflation from the previous April through September. Here’s how to use this information to compute the I Bond rate:
Here’s how the current rate of 4.80% that was announced in May 2005 came about.
193.3/189.9 = 1.01790, or a semi-annual increase of 1.790%.
So, Semiannual inflation rate = 1.79%
Fixed rate = 1.20% (set separately, not sure how)
Total rate = Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
Total rate = 0.0120 + 2 x 0.0179 + (0.0179 X 0.0120)
Total rate = 0.048, or 4.80%
So what’s going to happen when the rate changes on November 1st? We’ll know the Semiannual inflation rate for sure in Mid-October, but let’s see what we can guess now. Since we don’t have March-September (3/05-9/05) data, we could
A) Use the previous rolling 6 months, and use February-August (2/05-8/05) instead, or
B) Use March-September (3/05-8/05), and extrapolate another month’s worth of inflation.
Are you stil with me? I’m gonna do both.
Method A above
CPI-U in February = 191.8
CPI-U in August = 196.4
Change = 196.4/191.8 = 1.02398 or a semi-annual increase of 2.398%.
Again, I don’t know what the fixed rate will do. I don’t think the change will be radical, so I’ll use a range of 1.0-1.4%.
Using the above formulas and ranges of rates, Method A estimates the next I-Bond rate to be from 5.8%-6.2%.
Method B above
CPI-U in March = 193.3
CPI-U in August = 196.4
Change = 196.4/193.3 = 1.01604 or a 5-month increase of 1.604%.
I then divide 1.604 by 5 to get a monthly increase of 0.3208%. Extending it for six months gives me a semi-annual inflation rate of 1.9248%, or 0.019248.
Again, I’ll use a range of 1.0-1.4% for the fixed rate.
Using the above formulas and ranges of rates, Method B estimates the next I-Bond rate to be from 4.9%-5.3%.
Hmm.. that gives you a pretty wide range of possibilities, but I think it’s safe to say it’s very likely the rate will rise on November first. I’ll check back and update these predictions in Mid-October before then too.