Inflation Has Dropped to 3%. Are I Bonds Even Worth Buying Anymore?

Many consumers spent the better part of 2022 and early 2023 stressing out about inflation and the higher credit card bills it inevitably led to. But in recent months, inflation has cooled nicely. And in June, annual inflation was measured at 3%, as per that month's Consumer Price Index.

But while falling inflation may be providing relief to consumers, it also makes I bonds a less appealing investment choice right now. So before you put money into I bonds, you may want to consider other options.

Do I bonds still make sense?

I bonds are government-backed securities whose interest rates are tied directly to inflation. When inflation was surging last year, I bonds were a solid buy. But at this point, they're a bit more iffy -- not just due to slowing inflation, but due to the generous interest rates banks are paying.

Right now through Oct. 31, I bonds are paying 4.3% interest. And that's not a bad return for an investment that's considered virtually risk-free.

But come Nov. 1, the interest rate on I bonds is going to reset. And chances are, it's going to be a lot lower than 4.3% given where inflation is these days. Because of this, you may not want to commit your money to I bonds.

I bonds must be held for at least a year before redemption. So at a minimum, you're making a 12-month commitment. But you should also know that cashing out I bonds before having held them for five years will result in penalties. And since economic experts aren't anticipating another near-term surge in inflation, it may not make sense to tie up your money in an asset that isn't going to be all that lucrative.

Some other options to consider

The appeal of I bonds is that at least right now, they deliver a relatively high return with minimal risk. But if you want another risk-free option for your money, you can look at opening a CD.

CD rates are higher these days than they've been in years. And if you stick to an FDIC-insured bank and limit your deposit to $250,000, you won't risk losing out on principal.

Meanwhile, many CDs are paying around 5% interest for a 1-year term. So it could make more sense to lock in a CD than to put money into I bonds, since you'll face penalties with the latter for cashing them out before the five-year mark.

Another option to look into is opening a brokerage account and loading up on stocks. Going this route will mean taking on risk -- a lot more risk than you'll be looking at with I bonds or CDs.

But you should also know that over the past 50 years, the stock market's average return has been 10%, as measured by the S&P 500 index. Compare that to the limited-time 4.3% return you can get from I bonds, and it's clear that in the long run, stocks have the potential to do a lot more for your money.

All told, I bonds don't make the most sense right now because inflation is down and is expected to keep declining. If CDs weren't paying so generously right now, it would be easier to make the case to invest in I bonds for those who are very risk-averse. But given where CD rates are currently, they read like a much better choice at the moment.