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The Best Investment to Keep Pace With Inflation, Guaranteed -Part 1

By in Bond, Inflation, Investing, Reader Question | 5 comments

Keep Pace With Inflation With Best Investment for Inflation Protection

 “Inflation is the one form of taxation that can be imposed without legislation.” Milton Friedman

In recent year’s we’ve avoided the inflation monster. As Milton Friedman, the famous economist mentioned, inflation is just like a tax and makes everything you buy more expensive!  It’s painful when the soda 12 pack you bought last year for $4.50 costs $5.50 this year. That’s the sting of inflation. But there is a safe way for your money to keep pace with inflation.

I originally wrote this post several years ago, certain that inflation would increase and that investors needed inflation bond information. My prediction that inflation would heat up was correct – just a few years early. Now, with increasing inflation a reality, you must learn the secret that allows your cash to keep pace with inflation. 

To Keep Pace With Inflation, Be Prepared

A reader recently wrote in:

“I read in the AARP magazine about Series I Savings Bonds.  Right now they are 2.48% and they are variable depending on the inflation rate.  You have to keep them in for 1 year, and after that if you take the money out you lose the three most recent months’ interest. Any comment?”

Yes, government I Bonds are one of the best kept investment secrets and here’s how they work. 

I started buying inflation protected investments for my daughter in 2000. I exchanged some EE bonds she received as gifts for inflation advantaged bonds. At that time, I looked at both I Bonds and Treasury Inflation Protected Securities (TIPS). Both of these investments are issued by the government and their returns keep pace with the inflation rate.

I Bonds will help you keep pace with inflation.

Inflation Bonds Protect Against Inflation Risk

Inflation risk insidiously manifests by causing each dollar to purchase less.  With inflation, buy a pound of apples for $1.49 and six months later that same pound of apples costs $2.49. That’s a 67% increase in 6 months. Another way to look at inflation is; with inflation, the identical goods cost more.

In March 2018, inflation is hovering around 2.14%. If your savings account interest rate is 0.80%, the cash in your savings account is losing 1.34% or the difference between the inflation rate and your interest rate. This is called inflation risk. In the short term, it’s not a big deal, but if your financial returns don’t keep pace with the inflation then the value of your money is shrinking. 

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We each have our own personal inflation rate, depending upon what we buy. If you take public transportation, then an increase in the price of a new car won’t impact you. If you live in Arizona, then the price surge in melting salt doesn’t impact you. But regardless of your personal inflation rate, inflation is increasing and you need to learn about the best investment for inflation protection. 

Series I Government Bonds Keep Pace With Inflation

The government has two types of inflation bonds that are guaranteed to keep pace with inflation. This article drills into Government Inflation Bonds or I Bonds.  Inflation Bonds Part 2, examines TIPS Bonds or Treasury Inflation Protected Government Bonds. 

I Bonds are a conservative investment. You won’t receive capital appreciation greater than the inflation rate. I Bonds are more conservative than an investment in the stock market; unlike stocks, you don’t have the chance for an outsized gain (or loss) with I bonds. In contrast, when buying an I bond, you’re assured that your purchasing power won’t decrease. If your monthly bills creep up, so will the value of your I bonds!

Inflation Bonds 101 

 Buy a government bond and you are making a loan to the U.S. Government.

In exchange for the loan, the government pays you interest.

 How Does the I Bond Interest Payment Work?

With I bonds you not only get a fixed rate of interest, but you get a bonus;

You receive an adjustable rate of interest that changes along with the inflation rate.


The interest rate changes every 6 months.

 I Bonds are simple to understand.

  •  The fixed interest rate is set when you buy the bond. If you buy an I Bond in March 2018, you’ll receive a fixed rate of 0.10%. The fixed interest rate stays the same for the life of the bond.
  •  The adjustable part of the interest rate:
    •  Changes every six months. From November 1, 2017 through April 30, the semiannual rate is 1.24%. 
    • Is based on the Consumer Price Index for Urban Consumers (CPI-U).
  • The fixed and variable interest rates are combined. At present, the composite annual I Bond rate is 2.58%.
  • Every six months the composite interest rate changes for the I Bond.

Here’s a Blast from the Inflation Bond

From November, 2009 through April, 2010 the I Bond’s Earnings Rate was 3.36%.

            Fixed rate = 0.30%

            Adjustable rate = 3.06%

From May, 2015 through October, 2015 the I Bond’s Earnings Rate was 0.00%

The reason it was zero is because the inflation rate was -0.08% and the fixed rate, set at issue, was 0.00%. Don’t let this dissuade you from buying an I Bond. When inflation trends up, the variable portion of the I bond interest rate will increase, every six months.

How Much Do I Bonds Cost?

 You can buy them on-line at Treasury  or at a bank. They can be purchased for $50, $75, $100, $200, $500, $1,000, or $5,000. You can even set up an automatic direct purchase for the bonds. You buy them at face value – you pay $50 for a $50 I bond.

When are Earnings Added to the I Bond?

The I Bonds increase in value on the first day of each month as they earn interest and increase in value.

The interest is compounded twice per year.

When Can I Cash In the Inflation Bond and How Long Does it Earn Interest?

You can cash the bond in anytime after 12 months, but-if you redeem the bonds within 5 years of purchase, you lose the prior 3 months interest.

The bonds continue to earn interest for 30 years.

When you cash the bond in you get the original purchase amount of the bond  and all of the compounded earnings.

It’s preferable to buy I bonds with the intention to hold them for at least 5 years. That way, you’ll avoid the 3 month interest penalty if you sell early.

I Bonds Tax Implications

I bonds not only keep pace with inflation, they have another benefit. They aren’t subject to state or local tax, only federal. And you don’t have to pay the tax until the bond is cashed in.

I bonds aren’t perfect, the government’s calculation of the inflation rate may not perfectly correlate with your individual inflation rate. That’s because you may not buy all of the products that the government uses to calculate the inflation rate.

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How Many Inflation Bonds Can I Buy Annually?

You may buy up to $10,000 in electronic or paper I Bonds each year. You can also buy up to $5,000 in paper I Bonds with your tax refund. So, your annual I Bonds limit is $15,000.

Inflation Bonds Wrap Up

In response to the reader question, I like I bonds and invest in them myself. They are very safe. Consider investing in I Bonds for your emergency cash or fixed part of your investment portfolio. When it comes to capital preservation, these are as close to a sure thing as you’ll get.

Inflation is back and I Bonds are a low-risk way to keep pace with inflation. 

Read Part 2; Treasury Inflation Protected Securities, another inflation beating investment. >>>

Updated; March 18,2018 


  1. As I read the post I wondered about the tax implications. I wanted to make sure I understand what you said. There are no taxes due until you redeem the I bond. Does it have a maturity date? You mentioned 30 years but not whether that is a specific maturity date. So you can receive income from I bond but no taxes are do until you redeem the bond (or maturity)?

    Evolution Of Wealth

    May 2, 2010

  2. Is the primary role of the i-bond to protect against inflation? If so, then why not wait until the inflation begins to hit… or is it already?


    May 3, 2010

  3. @Evolution-Thank you for reading so thoroughly, very good questions. Yes, taxes are not due until you cash in the investment, and then, only fed, not state or local taxes. You may hold the I bonds for 1 year on up to 30 years. BUT, if you cash them in before 5 years, you lose 3 months of interest.
    @Ingrid, Your description is apt! We forget how devastating rampant inflation is!!
    @LeanlifeCoach-Good question. You can certainly wait until inflation ramps up, Then you will probably lock in a higher base interest rate. But the beauty of these investments is that when inflation goes up, the inflation adjusted part of the rate goes up (every 6 months). One strategy is to buy some now, and buy more later so you are averaging your rate of return as inflation increases.


    May 4, 2010

  4. Thank you all for such poignant comments-You are challenging me to think! I’ll be interested to hear your comments about my next post discussing a similar inflation protected investment:TIPS (Treasury Inflation Protected Bonds).
    It’s easy to buy TIPS in a mutual fund!


    May 4, 2010

  5. Thank you all for visiting and taking time to comment. Keep coming back, your remarks are always welcome. Be smart in your personal finances. Barb

    Barb Friedberg

    May 16, 2010


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