U.S. Disinflation Hits Retirees, Treasury Yields


Prices rose 1.7% over the last twelve months as the inflation growth rate continued to fall, pinching retiree incomes and long-term U.S. Treasury yields, which remain near their lowest point.

The Bureau of Labor Statistics reported a 0.1% increase in the Consumer Price Index in September on a seasonally adjusted basis, causing the Consumer Price Index for all urban consumers (CPI-U) to rise by 1.7% over the past year. The CPI for all items saw positive growth in September, after prices declined 0.2% in August. The slight rise in prices was above expectations for a flat CPI in September.

The largest price declines were seen in energy, which fell 2.6% in August and again 0.7% in September. Fuel oil deflation accelerated in September. After falling 1.2% in August, fuel oil fell 2.1% in September.

The decrease in fuel costs is a direct result of declining Brent oil prices on weak global demand and an abundant supply. Crude oil futures have fallen from $98 a barrel at the beginning of October to $86.34 in intraday trading Wednesday. Prices fell nearly 10% in September.

Piped gas service was the only energy cost to rise in September, up 1.6%, which partially offset the declines in oil, gasoline (down 1%), and electricity (down 0.7%) in the month.

Bonds React

The depressed inflation rate has caused long term U.S. Treasury rates to tumble in the past month. The 10-year Treasury bond lost 36 basis points to 2.24% in intraday trading on Wednesday. Short-term Treasuries have seen yields stable or rise slightly in the past month, causing smaller Treasury spreads.

The falling spreads and lower long-term yields are negatively impacting a number of groups, including retirees, investors, and large banks who rely on fixed income as a revenue stream or source of income. Banks and investment firms that rely on spreads between long-term and short-term lending rates to earn profits will see margins squeezed by the tightened spread between the two.

Meanwhile, retirees who invest in municipal bonds are also seeing their income opportunities constrained. According to Bloomberg, municipal bond yields for all terms except the two-year bond have declined in the past month. For 10-year municipal bonds, yields have fallen 23 basis points to 2.05%, actually 19 basis points lower than U.S. Treasuries.

Social Security Gains Modest, Food Pricier

Small changes in the CPI-U are also impacting Social Security beneficiaries, who will see a 1.7% cost of living adjustment to their Social Security incomes thanks to a lethargic CPI increase.

However, the low rise in prices will not benefit many retirees, since prices for food items are rising sharply, and at a much higher rate than any other goods category. Food prices rose 3.0% in the past twelve months in September, after a 0.3% rise from the prior month. Food prices at home rose even faster, at a 3.2% clip over the past twelve months, while food away from home rose 2.7%.

The rise in at-home food prices and the decline of high income investments with limited Social Security increases are making it harder for retirees to afford food. Analysts worry that this dynamic, combined with limited wage increases for public employees and flat or negative increases for private sector workers, could cause people to consume less, which in turn will limit the economy’s growth rate in the short term.