If Trump's Tariffs Lead to More Inflation, You'll Be Glad You Bought This Investment

Many experts, including the policy-making members of the Federal Reserve, are worried that President Donald Trump's tariff policies could lead to a spike in inflation. The tariff policies remain rather uncertain, and there are reports that trade deals are being worked out as I write this. However, some of the recent proposals are quite unprecedented, so there's no way to know for sure how they could affect the stock market, inflation, and the U.S. economy, in general.

When inflation soared to a four-decade high in 2022, Series I Savings Bonds, more commonly referred to as "I bonds," became an incredibly popular investment. If you're worried about inflation making a comeback in 2025, they could be worth a closer look right now, especially since the Treasury Department just raised the I bond interest rate.

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How I bonds can protect your money from inflation

I bonds are similar to most other U.S. Treasury securities with one big difference -- their yields vary over time and are tied to inflation.

Every six months, the Treasury Department announces its new I bond interest rates, which consist of two parts. There's a fixed interest rate that stays the same for as long as the purchaser owns the bond and an inflation adjustment that will change every six months following the date of purchase.

It was just announced that I bonds purchased from May 1 through Oct 31 will have a total interest rate of 3.98%, up from the previous yield of 3.11%. This consists of a 1.10% fixed rate and a 2.86% inflation adjustment. Regardless of when you purchase the I bonds in that six-month period, you're guaranteed this yield for the first six months. It will reset to the then-current variable rate every six months thereafter.

Here's the key point: If inflation spikes higher due to the tariff policies or some other reason, the variable rate should rise accordingly when it's time for the next adjustment. In other words, the higher inflation is, the more money you'll get from your I bonds.

Drawbacks to consider

I bonds aren't likely to beat the stock market over time, but that's not why you buy them. They can provide excellent inflation protection and help offset negative stock-market reactions to inflationary periods. For example, I bonds yielded 9.62% in mid-2022, a year when the S&P 500 fell sharply into a bear market.

However, there are a few drawbacks to keep in mind before you decide to buy I bonds. For one thing, you can't redeem them for at least one year, and if you cash out before the five-year mark, you'll get hit with a penalty. I bonds only make good financial sense if you're planning to hold them for at least five years.

Another major drawback, especially for high-net-worth investors, is that you're only allowed to buy a maximum of $10,000 per year. If you have a million-dollar portfolio, it can be tough to meaningfully hedge against inflation with just I bonds.

Having said that, I bonds can be a great financial tool for your portfolio, regardless of whether we see a spike in inflation in 2025 or not. Plus, right now, the fixed rate component is historically high, so it can be a good time to consider I bonds for a long-term fixed-income investment.

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