How the I Bond Composite Rate Is Calculated

The I Bond composite rate is the sum of a fixed rate (set at issuance, never changes) and a variable semiannual inflation adjustment based on the Consumer Price Index for All Urban Consumers (CPI-U). The Treasury recalculates the inflation component every May and November, keeping the fixed rate constant for the bond’s entire 30-year life.

The Core Formula

The Treasury uses this simple arithmetic:

Composite Rate = Fixed Rate + Inflation Rate

The fixed rate is locked in at purchase. If you buy an I Bond on November 1, 2024, with a 1.5% fixed rate, that 1.5% remains your fixed return for 30 years, regardless of what inflation does.

The inflation rate is half the CPI-U change over the preceding six months. For bonds issued May 1–October 31, the Treasury uses CPI-U data from November of the prior year to April of the current year. For bonds issued November 1–April 30, it uses May–October data.

The arithmetic matters: if CPI-U rises 2% over six months, the inflation component is 1%. If it falls 1%, the inflation component is –0.5%. (Note: the composite rate cannot drop below 0% — but the fixed rate floor ensures your bond always earns at least the fixed rate.)

A Worked Example

Suppose you buy a $100 I Bond on November 1, 2024, when the fixed rate is 1.50% and CPI-U has risen 2.4% over the six months ending October 2024.

• Fixed rate: 1.50% (never changes)
• CPI-U increase: 2.4%
• Inflation rate: 2.4% ÷ 2 = 1.20%
• Composite rate: 1.50% + 1.20% = 2.70%

Your bond earns 2.70% for the next six months (May 1, 2025), compounded into the bond’s value. On that date, the Treasury announces a new inflation rate, and your composite rate shifts accordingly.

Six months later (May 1, 2025), imagine CPI-U has fallen 0.6% over November 2024–April 2025.

• Fixed rate: still 1.50%
• CPI-U change: –0.6%
• Inflation rate: –0.6% ÷ 2 = –0.30%
• Composite rate: 1.50% + (–0.30%) = 1.20%

Now the bond earns 1.20% for the next six months. Your fixed component never changed, but the inflation component moved.

Why the Inflation Adjustment Exists

I Bonds are issued to protect savers from inflation. Traditional Treasury bonds pay a fixed coupon, so if inflation rises, the bondholder loses purchasing power. I Bonds solve this by having a built-in inflation hedge: whenever inflation rises, so does the bond’s yield.

The Treasury uses the CPI-U, a broad measure of price changes for urban consumers, as its inflation benchmark. It’s published monthly by the Bureau of Labor Statistics, so the six-month lag in I Bond rate adjustments reflects the time needed to collect and publish official CPI data.

The factor of 0.5 (using half the CPI change, not the full change) is a policy choice. It means I Bonds don’t fully compensate for inflation above the fixed rate, but they avoid paying more than necessary if deflation occurs.

Interest Compounding and Accrual

I Bond interest is compounded semiannually — meaning interest earned in the first six months is added to the principal, and the next six months’ interest is calculated on the larger amount.

If your $100 bond earns 2.70% in the first six months:

Interest earned = $100 × 2.70% ÷ 2 = $1.35 (half-year rate) New principal = $100 + $1.35 = $101.35

In the second six months, if the composite rate is 1.20%, the interest is calculated on $101.35, not the original $100. Over 30 years, this compounding adds significantly to the final value.

Key Rules and Constraints

Minimum holding period: You must hold an I Bond for at least one year before redeeming. If redeemed within five years, you forfeit the last three months of interest.

Maximum annual purchase: $10,000 per calendar year in electronic bonds per Social Security number (plus $5,000 in paper bonds via tax refund).

Fixed rate floor: The composite rate cannot be negative. If the inflation adjustment is –0.8% and the fixed rate is 0.5%, the composite rate is 0% (the bond earns nothing that period), not –0.3%.

Adjustable reset schedule: The inflation rate resets every May 1 and November 1, but not on your personal purchase anniversary. All I Bonds issued in a six-month period get the same inflation rate for the next six months.

Tax and Planning Implications

I Bond interest is subject to federal income tax but is entirely exempt from state and local income tax. Most savers defer federal tax until the bond is redeemed (after 30 years or earlier), though annual reporting is an option.

Because the rate adjusts with inflation, I Bonds are particularly valuable during high-inflation periods. During low or deflationary times, the fixed rate becomes more important — so bonds issued when rates are higher retain more appeal even if inflation later drops.

See also