I've been asked this question thousands of times since the start of the Series I Bond program in 1998 and it's finally making headlines: "If inflation dropped to zero, or there's a recession, what will happen to the interest rate of I Bonds?"
Recession, deflation or economic slowdown; any way you put it, it spells disaster for I Bonds. The I bond was originally introduced to be a hedge against inflation, but what will happen when there's no inflation? Well, savings bond owners are about to find out this Friday, May 1.
During the past four or five months, the country has actually been experiencing deflation at a factor of approximately minus 5.3%, according to the Urban Consumer Price Index (CPI-U) calculated by the government. Since the interest rate for the I Bond is a composite of an inflation rate and a fixed rate, there is widespread anticipation that the new I Bond will be close to 0% for the next six month interest earnings cycle.