Treasury Feeling Pinch of Inflation, Even as Federal Reserve Isn't

Inflation may not be seen as a major headache among consumers or the Federal Reserve these days, but it’s enough to pinch the Treasury Department’s coffers a little bit this year.

The Fed

The Congressional Budget Office, in its monthly budget review out Aug. 7, said it projects the Treasury Department to have paid out $25 billion more in interest payments through July than in the same period in fiscal 2016, mostly because of the Treasury’s inflation-indexed securities program.

The value of TIPS (Treasury Inflation-Protected Securities) fluctuates with movements in inflation, as measured by the Consumer Price Index. When prices rise, TIPS also rise in value, thus giving investors a hedge against inflation.

“The adjustments made in the first 10 months of fiscal year 2016 totaled $11.5 billion, whereas those made to date in 2017 have totaled $32.5 billion,” the CBO said.

TIPS are a relatively small part of the Treasury Department’s overall portfolio of debt securities, but even Treasury’s own data have shown an uptick in interest payments through June. The June Treasury budget statement said net interest payments for the current budget year through that month totaled $223.6 billion, up about 9.9 percent compared with the same period in fiscal 2016.

Treasury’s extra payout comes as inflation has remained relatively tame. The Federal Reserve’s policymaking Open Market Committee made no move tighten monetary conditions at its July 26 meeting.

“On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,” the panel said.