How to Insulate Your Portfolio from Inflation

Annual limits on the purchase of Series I is more than $10,000 if you have a tax refund or some other entity like a Trust or business. Additional inflation protection can be obtained through the purchase of Treasury Inflation Protection Securities (TIPS).

Question: I am worried that my retirement plan will not keep up with inflation and would like to increase my holdings of Series I savings bonds.  However, there is a $10,000 annual limit on purchase of these assets. What can I do?

Answer:   The purchase of Series I savings bonds is the single best way to protect yourself and your household against inflation. Series I Bonds are literally the only thing working in most portfolios today, a situation that will unfortunately persist unless inflation drastically recedes.

The Treasury limits direct purchases of Series I Bonds from Treasury Direct to $10,000.  However, taxpayers with a tax refund can purchase an additional $5,000 in Series I Bonds. Go here for a discussion of how to do this.   You can also purchase Series I bonds through a Trust or a business.   The first step is to go to Treasury Direct and set up an entity account.

The annual limits prevent most households from quickly increasing their holdings of Series I bonds in response to a sudden shift in inflationary expectations.

Additional protection against inflation can be obtained by purchasing Treasury Inflation Protection Securities (TIPs). There is $10 million dollar limit on each TIPS security for each auction.  I am not worried about every being constrained by this limit.

The price of TIPS varies with interest rates and inflationary expectations, and you can lose money on TIPS. But price risk can be managed by staggering the purchase dates and maturity dates of the TIPS bonds and holding the bonds until maturity.

Series I Bonds are sold at par and never fall in value.    The semi-annual rate can go up and down with inflation, however, the bonds will not fall in value with inflation.  Go here for Series I FAQs from Treasury Direct.  Go here for a comparison of Series Bonds and TIPS.Authors Note:  The paper Financial Decisions for a Secure and Happy Life  is a collection of eight essays.  One of the essays provides a lot of information on Series I bonds and Tips.  The author has also written extensively on health care with his most recent paper outlining potential 2024 care reform proposals

The Likelihood of Higher Future Interest Rates

Despite recent tightening by the Federal Reserve Board, interest rates remain relatively low both compared to past decades and the current inflation rate. Persistent Inflation will lead to a long period of higher interest rates.


Some pundits believe inflation has peaked, and it is now time to buy bonds. These pundits offer an inaccurate macroeconomic assessment and bad financial advice.

Comment One:  The nominal 10-year Treasury interest rate is roughly where it was in February 2014, but inflation is substantially higher. 

Both in February 2014 and September 2022, the 10-year constant maturity interest rate was 3.4 percent.

  • In February of 2014, the one-year inflation rate was 1.6 percent. It had hovered close to that level for the entire year.
  • The reported inflation rate in August of 2022 was 8.2 percent up from 5.2 percent, 12 months early. 

People purchasing 10-year bonds are now earning far less than inflation.   We should expect this gap to narrow and bond yields to rise unless inflation suddenly plummets.

Comment Two:   Interest rate comparisons based over data from the last 10 or 15 years are deceptive because rates have been abnormally low.

Comparisons to average and high interest rates over a longer period are more relevant.

  • This graph shows the 10-year rate reached 5.0 percent in June 1967 and stayed above 5.0 percent until July 1998, literally 31 years.  The current 10-year rate is 3.5 percent.
  • This graph reveals that while the current two-year constant maturity rate is at its highest level since 2007, it is also lower than any rate that existed between 1976 and August of 2001.

Comment ThreeThe reduction in interest rates requires a decrease in inflation, an unlikely outcome in the near term

In a previous era, the Federal Reserve used two tools, higher interest rates and lower money supply, to reduce inflation.  Today the main tool is higher interest rates, which remain below historic levels.   

The money supply has grown robustly during the pandemic and is at a high level compared to the size of the economy.  The impact of past increases in the money supply on the price level has not been fully realized.  Whether the Federal Reserve Board can reduce the inflation rate without reducing the money supply is questionable.

Comment Four:  Wages are likely to continue to increase, even if there is a recession, leading to 

significant wage-push inflation over the next few years.  

There are many reasons why worker compensation is likely to continue to increase over the next few years.

  • One way to reduce the gap between job openings and people, noted here, is to increase immigration, an outcome that appears unlikely in the current political environment.
  • Many workers are burnt out from COVID and resistance to returning to the office can increase wages in some areas, especially for firms and industries dependent on in-person work.  
  • There is a shortage of teachers, nurses, airline pilots, long-haul drivers, and highly skilled computer analysts. These shortages won’t be instantly reversed with the advent of a recession.  The shortage of nurses guarantees that health care costs, a key component of both the CPI and workers compensation will not fall in the near or intermediate term.   
  • Some unions have recent won large increases in compensation, with a recent example being the rail unions.  Increases in rail transport prices will increase the price of transported goods.

The wage-push inflation will make it very difficult to reduce inflation and return to the abnormally low interest-rate environment.

Comment Five:  The housing component of the CPI will not fall with an increase in interest rates.

The housing price component of the CPI described here is based on imputed rents.  An increase in mortgage interest rates generally leads to higher observed and imputed rents.

The increase in interest rates will reduce the affordability of new mortgages and decrease house prices. However, relatively few households buy or sell a house in a particular year.   Increases in interest rates, which delay home purchases, can increase both actual rents and imputed rents used for the CPI housing cost calculation.

Increases in the housing cost component of the CPI, stemming from higher interest rates, will contribute to inflation despite a decrease in aggregate demand from higher interest rates.

Comment Six:  More supply shocks leading to more inflation are likely.

The most likely supply shock from the Ukraine war involves higher food prices from disruptions in grain and fertilizer exports.

Concluding Remarks:   How should investors respond to this economic outlook?

Avoid long-term bonds, anything with a maturity more than two years.

Avoid bond ETFs.  Even shorter maturity ETFs and ETFS that own TIPS bonds have been problematic over the last year.

Purchase at least $10,000 in Series I Bonds every year from Treasury Direct.  Additional purchases beyond the $10,000 limit are possible through tax refunds, trusts and S-corporations.  For details go to essay five here.

Allocate a small share of your wealth to two-year Treasury bonds.  The purchase and maturity dates of the bonds should be staggered to create constant liquidity when the bonds mature.  Ownership of bonds is preferrable to investments in bond ETFs because bonds return the initial investment at par value on the maturity date.

Authors Note:  David Bernstein is the author of eight essays published in Financial Decisions for a Secure and Happy Life

Comparing traditional and chained CPI

Question:   What is the expected value of lifetime Social Security benefits for females and for males when benefits are linked to the traditional CPI and when benefits are linked to the chained CPI.

Discuss the reasons why women might prefer a switch to the chained CPI over proposals to partially privatize Social Security.

Short Answer:

Answer is contingent on several assumptions laid out below.  I find that changing from the traditional CPI to a chained CPI would reduce the expected value of lifetime Social Security benefits by around $16,000 for males and $21,000 for females.

The actual impact is invariably different from the expected impact.  Regardless of gender, people with the longest life span get the most from Social Security.

However, Social Security is really essential for females because private annuities are more expensive.  See my previous post on this topic.


Key assumptions:

The key assumptions in this analysis are

  1. Person retires at age 62 and receives an initial Social Security retirement benefit of $15,000 per year
  2. Traditional CPI grows at 2.42% per year
  3. Chained CPI grows at 2.09% per year.
  4. In year of death person receives ½ year Social Security Benefit
  5. Probability of surviving from age 62 to age y> 62 is determined by the CDC life tables for females and males.

Readers interested in the discussion of assumptions on difference between traditional and chained CPI might want to look at this post.

The expected lifetime Social Security benefit is E(SSB)=Sum(Pyr x CByr)  where Pyr is the probability of surviving to a particular year and CByr is the cumulative benefit from the retirement age at 62 to the year of death.

The logic behind the calculation of the probability a retiree survives to a specific date is similar to the logic behind the geometric distribution.   The probability of surviving to age y > 62 is the product of the probability of surviving to age y-1 and the probability of dying at age y.


The chart below has data on likelihood of surviving to age y+0.5 for males and females and the cumulative Social Security Benefit to age y+0.5 under both the existing COLA and a chained CPI COLA.

Survivor Probabilities and Cumulative Benefits
Age y Probability of surviving to exactly age y+0.5 for males Probability of surviving to exactly age y+0.5 for females Cumulative Benefit With Existing COLA Cumulative Benefit With COLA linked to chained CPI
62 0.01321 0.00831 $7,500 $7,500
63 0.01405 0.00896 $22,682 $22,657
64 0.01496 0.00965 $38,230 $38,130
65 0.01599 0.01044 $54,156 $53,927
66 0.01713 0.01133 $70,466 $70,054
67 0.01830 0.01227 $87,171 $86,518
68 0.01946 0.01322 $104,281 $103,327
69 0.02062 0.01422 $121,805 $120,486
70 0.02178 0.01526 $139,752 $138,004
71 0.02306 0.01647 $158,134 $155,889
72 0.02458 0.01783 $176,961 $174,147
73 0.02620 0.01929 $196,244 $192,786
74 0.02780 0.02077 $215,993 $211,816
75 0.02935 0.02224 $236,220 $231,243
76 0.03079 0.02380 $256,936 $251,076
77 0.03230 0.02547 $278,154 $271,323
78 0.03392 0.02732 $299,885 $291,994
79 0.03557 0.02926 $322,143 $313,096
80 0.03691 0.03112 $344,938 $334,640
81 0.03791 0.03288 $368,286 $356,634
82 0.03876 0.03473 $392,198 $379,088
83 0.03954 0.03677 $416,690 $402,011
84 0.03996 0.03858 $441,774 $425,413
85 0.04032 0.04017 $467,464 $449,304
86 0.04010 0.04170 $493,777 $473,694
87 0.03929 0.04275 $520,727 $498,594
88 0.03787 0.04322 $548,328 $524,015
89 0.03584 0.04302 $576,598 $549,967
90 0.03325 0.04209 $605,551 $576,461
91 0.03021 0.04041 $635,206 $603,509
92 0.02681 0.03798 $665,578 $631,123
93 0.02321 0.03490 $696,685 $659,313
94 0.01957 0.03128 $728,544 $688,093
95 0.01604 0.02730 $761,175 $717,474
96 0.01276 0.02314 $794,596 $747,469
97 0.00984 0.01903 $828,825 $778,091
98 0.00734 0.01513 $863,882 $809,353
99 0.00529 0.01163 $899,788 $841,269
100 0.01012 0.02606 $936,563 $873,851
1.00000 1.00000

The expected value of lifetime benefits for males/females under traditional/chained CPI is simply the dot product (the sum product function in EXCEL or NUMBERS) for the relevant probabilities and cumulative benefits.

Impact of Change in COLA by Gender
Males Females Difference Females- Males
Traditional CPI $392,077 $463,804 $71,727
Chained CPI $376,005 $442,772 $66,767
Difference Traditional-Chained CPI $16,072 $21,032

The change in the COLA formula from the traditional CPI to the chained CPI leads to a reduction in expected lifetime benefits of $16,000 for males and $21,000 for females.

Social Security still provides longevity protection under a chained CPI.

This is especially important for females because of their longer life expectancy.

Concluding Thoughts:

The issue of the Social Security COLA is important and complex.   I am of the view that a change in the COLA could be part of a package of Social Security and retirement reforms.  Social Security reform must also encompass additional revenues and rule changes that eliminate future automatic cuts in Social Security benefits.   Pension reform must encompass improvements t0 401(k) plans and additional sources of low-cost annuity income.

Some readers might be interested in my views on the politics of the COLA debate.

Impacts of shift from traditional to chained CPI on Social Security Benefits

Question: What is the potential annual impact and cumulative dollar impact of a policy change that links Social Security benefits to the chained CPI rather than the traditional CPI?


Analysis presented here pertains to a single retiree who retires at age 62 with a $1,250 per month Social Security retirement benefit.

The traditional CPI grows at 2.42% per year.  The chained CPI grows at 2.09% per year.     These statistics were based on BLS data over the 1999 to 2013 time period.  Economists at the Bureau of Labor Statistics at the Department of Labor informed me that they did not have data on the chained CPI for years prior to 1999.

See the link below for statistics on the traditional and chained CPI.

Analysis:  Information on the growth of the annual Social Security Benefits adjusted for the traditional CPI and adjusted for the chained CPI is presented for a retirement potentially spanning from age 62 to age 100 is presented in the table below.

In this table, the first column is age, the second column is the Social Security benefit adjusted by the traditional CPI, the third column is the Social Security benefit adjusted for the chained CPI, and the fourth column is the cumulative change in the Social Security benefit due to the adjustment process.

Path of Social Security Benefit With adjustment based on the traditional CPI Path of Social Security Benefits with Adjustment based on the chained CPI Reduction in Benefits for Age Due to Switch from Traditional to Chained CPI Cumulative Reduction in Benefits
$15,000 $15,000 $0 $0
$15,363 $15,313.50 $50 $50
$15,735 $15,633.55 $101 $151
$16,116 $15,960.29 $155 $306
$16,506 $16,293.86 $212 $518
$16,905 $16,634.41 $271 $788
$17,314 $16,982.06 $332 $1,120
$17,733 $17,336.99 $396 $1,516
$18,162 $17,699.33 $463 $1,979
$18,602 $18,069.25 $533 $2,512
$19,052 $18,446.90 $605 $3,117
$19,513 $18,832.44 $681 $3,797
$19,985 $19,226.03 $759 $4,557
$20,469 $19,627.86 $841 $5,398
$20,964 $20,038.08 $926 $6,324
$21,472 $20,456.88 $1,015 $7,338
$21,991 $20,884.42 $1,107 $8,445
$22,523 $21,320.91 $1,202 $9,647
$23,068 $21,766.52 $1,302 $10,949
$23,627 $22,221.44 $1,405 $12,355
$24,198 $22,685.86 $1,513 $13,867
$24,784 $23,160.00 $1,624 $15,491
$25,384 $23,644.04 $1,740 $17,231
$25,998 $24,138.20 $1,860 $19,091
$26,627 $24,642.69 $1,985 $21,075
$27,272 $25,157.72 $2,114 $23,189
$27,932 $25,683.52 $2,248 $25,437
$28,608 $26,220.31 $2,387 $27,824
$29,300 $26,768.31 $2,532 $30,356
$30,009 $27,327.77 $2,681 $33,037
$30,735 $27,898.92 $2,836 $35,873
$31,479 $28,482.01 $2,997 $38,870
$32,241 $29,077.28 $3,163 $42,033
$33,021 $29,685.00 $3,336 $45,369
$33,820 $30,305.41 $3,515 $48,884
$34,638 $30,938.79 $3,700 $52,583
$35,477 $31,585.42 $3,891 $56,475
$36,335 $32,245.55 $4,090 $60,564
$37,215 $32,919.48 $4,295 $64,859

Some observations:

  • The annual impact of the change from the traditional to chained CPI grows over time.
  •  The annual impact is $463, at age 70 $1,302 at age 80 at age 80, $2,532 at age 90, and $4,294 at age 100.
  • The cumulative impact of the change in the COLA formula is $1,979 at age 70,  $10,949 at age 80, $30,356 age 90, and $64,859 at age 100.

Some Implications:

  • The change from a traditional to chained CPI would have a very large impact both on household and national finances.
  • The fiscal impact of the change in the COLA formula would grow for 38 years until it reaches a constant rate.   (After 38 years the new COLA fully impacts all retirees based on their age.)
  • The change phases in slowly which gives people time to respond and change spending patterns.
  • The annual and cumulative impacts are largest for people near the end of their life when expenses both from increased medical needs and a need to change living arrangements are largest.

You may be interested in my policy blog on the Social Security COLA.

Unemployment, Labor Force Participation, and the Government Deficit

Unemployment, Labor Force Participation and the Government Deficit

Issue:   The Chart below has data on three important economic variables – the unemployment rate, the labor force participation rate and the government deficit as a percent of GDP.   The unemployment and labor force participation rate variables are observed on three dates   — July 2009 (near the peak of the recession) January 2017 (the month of President Trump’s inauguration), and September 2009 (the most recent month at the time of this writing.

What does this data say about the recovery after the recession under President Obama?

What does this data say about the impact of President Trump’s economic policies on the labor market and on the government deficit?

How does information from the unemployment rate and information obtained the labor force participation rate differ regarding, evaluations of the economic records for Obama and Trump, an assessment of the current strength of the economy and projections of the likely path of debt to GDP?

Three Economic Variables
Unemployment Rate
Date Value
Jul-09 9.5
Jan-17 4.8
Sep-18 3.7
Labor Force Part. Rate
Jul-09 65.5
Jan-17 62.9
Sep-18 62.7
Government Deficit as % GDP
Date Value
FY 2009 -9.8
FY 2016 -3.2
FY2018 -4.2


The unemployment rate fell from 9.5 percent during the recession to 4.8 percent at the end of President Obama’s term.

The unemployment rate has continued to fall under President Trump and is currently at 3.7%.   This is the lowest level since 1969.

The labor force participation rate was higher during the recession than at the end of President Obama’s term.

The labor force participation rate has not risen under President Trump despite the tax cut.


The government deficit fell from 9.8 percent of GDP in 2009 (recession year) to 3.2 percent in 2016 (last Obama year.)

The FY 2018 deficit as a percent of GDP is 4.2 percent, substantially higher than when President Obama left office.


An analysis of economic conditions and the labor market based on the unemployment rate alone would conclude that the job market and economy are red hot.   The unemployment rate has not been this low since 1969.  President Trump’s tax cut is one reason why the unemployment rate fell to its current level.

An analysis of the recovery from the recession and current economic condition incorporating information about the labor force participation rate, indicates the economy is not over heated.

Many critics of President Obama claimed that recovery was weak because the labor force participation rate remained very low.

The labor force participation rate is lower under President Trump than under President Obama.   President Trump’s economic policies have failed to increase the labor force participation rate.

President Trump’s economic policies have increased the government deficit as a percent of GDP.  The 2018 fiscal deficit is over 30 percent higher than the 2016 fiscal deficit.

Concluding Thoughts:

My view is that the LFPR has decreased due to population aging and further stimulus will not expand the workforce.  Moreover, the decrease in unemployment which coincided with the tax cut will not persist for much longer.   The loss of revenues from the tax cut will be larger in FY 2019, 2020 and 2021.   The budget deficit could be larger than 9 percent of GDP prior to the start of the next recession.

President Trump by reducing taxes and expanding deficits in a strong economy has weakened the ability of fiscal authorities to stimulate the economy when the next recession hits.

Authors Note:   I hope you will try my book

Innovative Solutions to the College Debt Problem: