Should you buy Series I bonds as inflation persists?

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With everyday costs trending upward, many savers may be looking for ways to inflation-proof their wallets — including their savings.

The latest Consumer Price Index showed prices continued to climb in August, up 0.4% on a monthly basis and up 3.4% from a year earlier, largely driven by rising energy costs.

One way to hedge against inflation: explore alternative savings options.

Series I bonds are government-backed savings bonds tied to inflation. Each bond is issued at face value with a 30-year final maturity, consisting of a 20-year original maturity period immediately followed by a 10-year extended maturity period.

The bond's composite rate, or earnings rate, has a two-part structure: a fixed rate and an inflation rate. The fixed rate stays the same for the duration of your bond's term, while the inflation rate can change every six months.

I savings bonds earn interest monthly, and that interest is compounded semiannually.

Another benefit of these bonds is that, while they are subject to federal income tax, they are exempt from state and local income tax. Savers can choose whether to report each year's earnings or report their earnings all at once when they cash out their bond. Additionally, if you choose to use your money for qualified higher education expenses, you may not have to shell out any tax on those earnings.

Series I savings bonds issued between May 1, 2026, and Oct. 31, 2026, are currently offering a composite rate of 4.26%, with a 0.90% fixed rate.

Savers can buy I bonds electronically for as little as $25, up to $10,000 per calendar year, through a TreasuryDirect account .

Series I bonds can be an attractive savings vehicle during periods of rising inflation because the combined rate increases alongside inflation, giving savers a built-in hedge against rising prices.

These bonds are also currently offering yields that are well above national averages for other savings vehicles. The national average rate for a traditional savings account is only 0.38%. Money market accounts and certificates of deposit (CDs) offer slightly higher national average rates at 0.63% for money market accounts and 1.71% for a 12-month CD, but this is still significantly less than the going rate for a Series I bond.

If the inflation rate continues to rise, that could translate to even higher returns for bondholders. In 2022, Series I bonds reached rates as high as 9.62%. Unlike your average savings account or CD, investing in this kind of bond can offset the cost of rising inflation. However, this can be a double-edged sword. Because a portion of the rate is variable and tied to current inflation, the rate can fall significantly — sometimes to near zero — meaning your returns could end up being lower than other investments.

These bonds are not without drawbacks, and it's worth understanding the rules and limitations before committing.

These bonds come with a mandatory lockup period. This means that you cannot redeem an I bond for at least 12 months after the purchase date. If there's a chance you'll need to tap into those funds earlier, I bonds aren't the right fit.

After that holding period is over, you can access your money, but doing so within the first five years of holding your bond would incur a penalty of three months' interest.

There are also purchase limits to keep in mind. You can only buy up to $10,000 in electronic I bonds. Before Jan. 1, 2025, you could purchase an additional $5,000 in paper I bonds with your tax refund for a combined maximum of $15,000 per year, but this option has been phased out.

How do Series I bonds compare to HYSAs, and who should get one?

Series I bonds and HYSAs both offer above-average savings rates, but they differ significantly in terms of features and capabilities. If you're the kind of saver who values liquidity and higher maximum deposits, a high-yield savings account may be the better option. The trade-off is that these accounts can also come with monthly fees, and interest rates are not fixed and can be volatile at times.

Savers who value fixed rates and have longer-term savings goals that won't require access to their money in the immediate term can benefit from the stability of a Series I bond; however, the maximum limit of $10,000 could be a deterrent if you aim to save a lump sum for a more costly financial goal.

Ultimately, both savings options can be beneficial and are certainly worth considering with inflation creeping back up.

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