Ask Money


Chris Farrell Aug 7, 2009

Question: Do you agree with the U.S. Dept. of Public Debt that the current inflation rate is MINUS 5.56%? I have 3-I bonds purchased August 2000 with a 3% fixed rate. When I saw a zero interest rate for my bonds I asked Public Debt what happened to my 3%? They added the new MINUS 5.56% to my 3%. Are they manipulating the word inflation? I think of it as being zero at it lowest. Valerie, San Francisco, CA

Answer: It’s a hard number to believe with the everyday pressures on our budgets to pay for gas, food, insurance, and the like. But the green-eyeshade brigade at the Bureau of Labor Statistics isn’t manipulating the data. The government statisticians there live for these numbers. They take it seriously. So, although the price index IS incomplete and has flaws, no one is trying to be the number-crunching version of a Bernie Madoff.

What the decline in the consumer price index reflects is the downward momentum of the global recession, the longest, most severe recession since the Great Depression. It isn’t just in the U.S., either. Inflation rates in almost all economies have fallen sharply along with declines in commodity prices, the lack of consumer demand at the mall, and the steep drops in housing values.

Against this backdrop, any increase in the overall price level is a long way off. Right now, I think the fear of deflation or a decline in the price level is haunting central bankers worldwide. But at some point–hopefully soon!–the economy will revive and we’ll get a good inflation scare. Most economists expect one considering all the money the Fed has pumped into the system to shore up the economy over the past three years. That’s the risk an I-bonds is designed to protect you against and it’s why I think there is value for the long-term saver in owning I-bonds.

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