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The USDi Return for May is Not an Estimate!
This is just a brief note to clarify something about the construction of USDi, about which I’ve gotten a number of calls. Before I do, let me also tell you to be on the lookout for my blog next week, when I’ll tell you what I think about Probable-Next-Fed-Chairman Kevin Warsh. (In the behavioral economics world we call that a ‘precommitment’ strategy that has the effect of forcing me into doing it. It’s overdue anyway.)
In May, the USDi token (freely mintable at https://usdicoin.com/coin/ ) will return 12.59% annualized. That’s not an estimate, and it isn’t a typo. As I type this, USDi is in the midst of a month wherein its price is increasing at a 5.65% annualized pace. Its current price at the moment when I am writing this is 1.034237. At the end of April, its price will be 1.035424. At the end of May, its price will be 1.046286. The movement from the end-of-April price to the end-of-May price is 1.049% for the month, which annualizes to 12.59%.
Note that I am not saying its price ‘may be’ or ‘will be approximately.’ While the price you see if you buy USDi on Uniswap or another liquidity pool may not be exactly that, those are precisely the prices you can buy or sell at on our website if you do it at exactly the end/beginning of the months in question. (To be fair, I’ll also note there is a small fee to mint or burn. These are listed on the minting page under the header ‘What are the transaction fees,’ and they range from a low of 0% if you mint over $5mm, to a high of 0.05% – but at least a dollar – if you mint less than $100,000. So, your return will more likely be 0.99% for the month, or 11.88% annualized. Still pretty good).
This is an important nuance. USDi is not a tokenized money market fund, or some other tokenized fund, where the buyer gets a small share of the fund’s performance. If it was, then USDi would be a security and you couldn’t buy it at all in the U.S. unless we filed a Form D and performed AML and KYC on you. That wouldn’t be a very useful crypto tool. So we made USDi an indexed currency, similar to the Unidad de Fomento in Chile, that depends only on the value of the Non-Seasonally-Adjusted CPI index, mechanically. It accretes just like a TIPS bond, except that it does it every block, not just every day. I walked through the particulars last year in How to Calculate USDi’s Current Value.
Now, a TIPS bond – even a short-dated TIPS bond – also experiences changes in price. So while the principal of the October 2026 TIPS, and every other TIPS, will accrete 1.049% for the month of May…those bonds will also experience price changes. In particular, it is extremely likely that they (at least the short-dated ones) will decline in price over the course of the month since each successive buyer will have the right to less and less of that sweet accretion. Either way, you don’t know what you’ll have in a month if you buy a TIPS bond. But USDi has no maturity date. It is not a bond whose price declines when interest rates rise. It is inflation-indexed cash, or (if you prefer) analogous to an inflation-linked CD where the bank is paying you 12.59% for the month, but which you can cash out at any time with no penalty.
This remarkable return – which is likely to remain pretty attractive in June if the inflation swaps market is right about where NSA CPI will print when we get that data next month – is due to the spike in gasoline prices last month, which passed through fairly directly to the CPI.
The next logical question is ‘where does that return come from?’ I am going to skip that answer for now because when I talk about the underlying investment dynamics people tend to get confused and think that the underlying investment dynamics determines how USDi behaves. It doesn’t. Furthermore, the answer to that question does involve a fund that is a privately-placed security and which (therefore) it’s awkward to discuss on a public forum.
But mainly, I don’t want to confuse you. USDi this month is earning 5.65% annualized, and it will earn 12.59% annualized next month. The first estimate concerns June, and an estimate based on the inflation swap market suggests USDi will earn around 9% annualized in June. When we get the CPI in a few weeks, that return will crystallize and we will know June’s return absolutely.
I repeated this point about five times because it seems to me people are being very cautious about buying USDi at the very time that people should be agog over the known future returns and grabbing it. I understand why a big hedge fund might not want to buy $50mm of USDi without ever having experimented before. It is more confusing to me why folks aren’t buying $5k or $10k to try it out and see how it works. Don’t get me wrong, the flows are positive. They’re just…very timid. So just in case the concern is that ‘maybe this return won’t really happen after all,’ I wanted to be clear (here comes #6) that May’s return is baked in the cake. Go get some cake.
Inflation Guy’s CPI Summary (February 2026)
It’s going to be hard to get too jazzed about today’s CPI report. Because it is entirely a pre-Iran-war number, it won’t have any of the energy spike that will make next month’s figure so exciting/alarming. Now, ordinarily I’d say that this will be the last ‘clean’ number without those influences, but this number isn’t in any sense clean because there are still echoes of the shutdown in it. Still, the fun part of those echoes will be in April’s number when the rent figures will have a one month spike as the October OER sample (all zeroes by assumption) drops out of the calculation. And that month will have Iran in it also. So buckle up for the next couple of months.
For February’s figure, though, the expectations were for +0.26% on headline inflation and +0.24% on core. Right around 3%, and not representing a return to the Fed’s target, but not too far off – except for the fact that it looked like they were on the upswing even before the Iran thing. Will anyone care?
Now, the US CPI swaps curve does have the influence of the war in it. But I present it here because it’s interesting. It isn’t surprising that it is inverted, with the near-term inflation higher due to energy, but the long end lower? That looks odd. But I’ll circle back to this later as it is actually a good reminder.
Also interesting, by the way, is the following chart of 5-year inflation swaps in several theaters. It is interesting that despite the wild ride in energy, US 5y CPI swaps haven’t moved very much – and certainly less than elsewhere. That’s partly because the US is less sensitive to oil prices than some other economies but also because the dollar has tended to be positively correlated with oil prices, dampening the direct pass through. It still looks like a lot to me, though. This is a 5-year tenor so also surprising that it moves that much with spot energy being the main source of volatility.
With those preliminaries, let’s look at the actual data.
The forecasts were pretty good: actual headline CPI was +0.267% while core was +0.216%.
The Apparel price spike is odd, but these happen from time to time and it’s a small category. The rise in Medical Care, which was mostly Hospital Services, was mildly discomfiting but on the other hand shelter was soft.
Core services and core goods both softened y/y. Core goods is at +1% y/y. The downward hook is expected, but the real question is whether it settles at +0.5% or -0.5%. I’m betting 0.5%. Still, it’s good news.
The singular surprise/miss was in Primary Rents. Owners’ Equivalent Rent was +0.22% m/m, about the same as last month and drifting lower y/y (although that will change in a couple of months when the OER sample rolls out the October zeroes). But Rent of Primary Residence was +0.13% m/m.
Clearly the trend is lower, but the sharp break (probably retraced somewhat next month) is quite surprising given the upward cost pressures on landlords. I suspect there are some big compositional changes here – rents possibly under pressure in big cities where reverse immigration flows are relieving pressure on the housing stock, and possibly some effect from NYC’s outmigration as well. I will have to dive into the details to see. But not right now.
Lodging Away from Home was +1%. This has been recovering from the dip last year but hotel prices are still below the post-COVID “gotta get away” highs. It’s a decent bet that we will see new highs here in 2026.
Airfares were also up, +1.4% m/m. Keep an eye on this. With energy prices going up, this is a fairly direct passthrough. Not this month, which is for February, but if jet fuel prices remain elevated then airfares will go up (and that ‘looks’ like core inflation even though it really isn’t).
The red dot is end-of-February numbers. But currently, Jet Fuel is at $3.49…it was at $4.11 just a couple of days ago. This will show up in airfares next month.
Let’s look at ‘supercore’, core services ex-shelter. Last month, supercore was +0.59% m/m; this month it’s “only” +0.35% m/m. Right now, on a y/y basis, Core Services ex-Rents is 2.94%, but that will jump next month as we are rolling off a very weak figure from last March. That’s when we had Airfares -5.27%, Lodging Away from Home -3.54%, and Car and Truck Rental -2.66%. That’s all dropping off, so next month we will see a rise in y/y supercore even if the m/m figures are soft. And they won’t be.
The distribution of price changes overall this month is interesting. There were a number of categories that rose less than 1% on an annualized m/m basis, but most of them not by very much. (The red text indicates the change is based on my estimate of the seasonality rather than the way the Cleveland Fed does this.)
There were also a lot of upper-tail categories, but the upper tails are longer. Of course, Median CPI (I don’t trust my estimate this month but I think it will be soft, probably less than 0.2%) doesn’t care how long the tails are. That’s the point of median.
So normally, median is comfortably above mean CPI because for a long time we have been in a disinflationary regime where tails were longer to the downside (aka negative skewness). This month that might not be true. I’ve written about this in the past: in inflationary cycles, long tails are to the upside so mean tends to be above median. But this is just one month and I’m not going to read too much into it yet.
On Fed policy: given what has happened in March, the February numbers aren’t going to be very meaningful. But the market seems to be misunderstanding the importance of the energy spike, treating it as an inflationary impulse that makes the Fed’s job difficult given weak employment data. That’s wrong. A rise in CPI that is caused by energy is not the sort of inflation the Fed leans against. That’s because energy is mean-reverting, but also very anti-growth. Remember that earlier I noted that the CPI curve was inverted but also the longer tenors were lower than a month ago? That’s probably because the inflation market is pricing a recession (which isn’t disinflationary, but the market believes it is). Anyway, if the Fed tightened into an energy price spike, they’d be making a recession worse. That was a big part of the 1970s Fed errors. The Fed knows about those errors, and so an energy price spike is more likely to produce a Fed ease in context with weak employment data, than a tightening. This isn’t stagflation, if core continues to decline. It’s stag, but headline CPI heading higher is not inflation if core/median remains tame.
(To be sure: I don’t think core and median are going to remain contained and in fact I think they are already starting the process of rolling back to the mid-to-high 3s. The Enduring Investments Inflation Diffusion Index is confidently moving higher.)
(But the Fed doesn’t believe that. We could well end up talking about stagflation properly but people will still get confused with the headline spike. Sigh.)
Here’s another important implication: given what has happened in March, the February numbers aren’t going to mean much for policy, so people will move on quickly from this especially as they were close to expectations. But, the NSA increase this month was +0.47%, so that is what matters for USDi. In March, USDi will increase 0.37% (4.5% annualized). In April, it will increase +0.47% (5.8% annualized). And here’s the thing: right now the inflation swaps market is pricing March CPI at +0.91% NSA…if that happens, then the May USDi increase will be at an 11% annualized rate…
The bottom line for this report is that February’s number is going to be swiftly forgotten. The next few are going to be very exciting, and not in a good way!
Profiting From Zero Duration Inflation
One of the nice features of the USDi digital currency is that its path is known with certainty well in advance. The price of USDi is determined by the interpolated CPI index value compared with the value on the reference day (315.605). So, for example, we know that today’s[1] USDi value is 1.02681 because today’s CPI index value is 324.06614, and we know that because we know how to interpolate between the CPI prints from 3 months ago (324.122) and 2 months ago (324.054).
Importantly, those numbers we are interpolating between are the Non-seasonally-adjusted CPI figures from December (released in January) and January (released in February). And that interpolation methodology is exactly the methodology that TIPS use.[2]
You will notice that the CPI from 2 months ago is lower than the CPI from 3 months ago. That means that prices actually fell, before seasonal adjustment, which means that USDi actually declined slightly over the course of the month. It was even worse in January, because the November CPI was – as I have noted before – complete garbage due to the fact that BLS procedures led them to assume zero inflation for a lot of the missing October data. In the chart below, you can see the sharp correction during which USDi actually declined during January (and slightly further, in February).
Now, because we can ‘see the future’ due to the interpolation mechanism, we know exactly where USDi will trade each day in March. That’s also indicated on the chart. So we know that in March, USDi will rise at a 4.53% annualized pace. One-month t-bills are 3.6% right now. You do the math.
It gets better: the same BLS procedures that led to the terrible November number lead to self-correction, so the CPI Index will catch up over time. The biggest part of that catch-up is due to the rotation of the rent sample over 6 months, so while we do not know exactly what CPI will print at for February, March, April, and May, we have a good confidence that it will be above trend. We can see that from the CPI “fixings” market where those particular CPI prints trade. The market price is the market price, and sometimes wrong, but based on what trades in the market right now we can anticipate (orange line above) that USDi will climb at an annualized rate of 5.63% in April and 5.53% in May before slipping back to a still-better-than-bills 4.17% in June.
What does any of this have to do with duration?
Well, you may read this and say to yourself “I can get the same benefit if I just buy short TIPS bonds.” But no, you can’t. That’s because when you buy a TIPS bond, the principal amount rises with inflation but you still have to deal with price. It turns out that TIPS traders are very aware that their accretion (what we call the uplift in principal) is going to be higher than TBill rates over the next few months, and so the current price of TIPS bonds fully discount this. The July 2026 TIPS, which will mature at the CPI index value of July 15th (which is interpolated between April’s CPI and May’s CPI, so it includes all of those rebound months), trades at a price of 100-13…and remember, it matures at 100. So you’ll gain the accretion, but lose on price. I’ll save you the math: that price means the real yield of that bond is about -1%, which is convenient since the CPI between now and then is going to be something around 1% higher than the Tbill yield.
Every day that passes, as the principal value of the TIPS bond accretes, the price will decline. The only way you can profit versus fixed-rate Treasuries is if you are smarter than the market, and your forecast of CPI is better than what is already embedded in the price of the bond.
USDi has a price, but it is completely insensitive to yields which means you do not have to pay a premium to buy it now (nor did you get a discount back in December knowing the bad January numbers were coming). You can buy USDi today knowing that you will earn those exciting forthcoming CPI prints, without sacrificing principal.[3] You can buy USDi against USDC on Uniswap, or simply go to https://usdicoin.com/mint.
I’ve told you before how interesting USDi is since it’s the zero-duration instrument. Here is another concrete example.
[1] I say “today’s” because I am illustrating all of this with daily interpolation, but in practice USDi interpolates every block or “hash,” which is just a few seconds in length.
[2] …except for the fact that TIPS interpolate daily and USDi almost continuously.
[3] Of course, this is not investment advice. Although it sure sounds like it. Do your homework!
How to Calculate USDi’s Current Value
I haven’t been writing a lot during August, nor have I done many podcast episodes. I feel like I make this apology almost every year, but it seems every year August just gets slower, and slower, and slower – and any content I push out gets less engagement during August than during any other full month (although the end of December, naturally, gets very thin as well. It’s really remarkable how August has changed during my career. In the 1990s, there were maybe a couple of weeks that were a little thin in the markets, but that has metastasized so that now it’s all of August and a week or two into July. I am speaking of the US markets – Europe has always been slow for the second half of the summer, at least in my experience, and I don’t know if there has been much change in that over the last few decades.
In any event, I’m more than happy as a writer to take a little time off and recharge. As an entrepreneur? Not so much.
This is, though, a good time for a ‘utility’ post. As readers know, a few months ago we launched USDi, the first CPI-linked cryptocurrency that’s fully backed by traditional finance assets. Because those assets for the most part reside in a private fund (which, because it’s a private fund issued under Reg D, I can’t talk much about on a public post so forgive my vagueness here about what the fund does and how), there is regularly confusion when potential buyers of USDi think that they are buying a share of the fund. They are not, for two reasons. The first is that a coin that represents a tokenized share of a traditional-finance fund would clearly be a security under US law, which creates lots of other complexities that we don’t want: for example just as I can’t tell you much about the fund, if the token was a security then I couldn’t tell you much about that, either! Which would make distribution difficult, to say the least.
The second reason that we didn’t want the coin to represent a tokenized share of the fund is that then the coin would not exactly track CPI. It is important that the coin be a zero-risk instrument, and I illustrate why that’s important in the post “USELESS Coin vs Very Useful Coin”. Accordingly, USDi’s value is entirely formulaic, and known in advance by at least a few weeks. It’s my purpose today to explain how the value of USDi is derived from CPI prints.
USDi, like TIPS and US CPI swaps, is linked to the Non-seasonally Adjusted Consumer Price Index for All Urban Consumers…the NSA CPI for short. The CPI that is released every month is related to this number – specifically, the ‘headline CPI’ is the month-on-month percentage change in the Seasonally-adjusted number. Here is where you find that number (rounded, of course) in the monthly BLS release found at https://www.bls.gov/news.release/cpi.nr0.htm:
The problem with using a seasonally-adjusted number is, you guessed it, that the seasonal adjustment factors can change. Consequently, all inflation derivatives rely on NSA numbers, which are almost never revised. In the same report linked above, the BLS notes the NSA number:
The highlighted number, 323.048 in this case, is the number that TIPS traders and inflation swaps traders care about. And, if you buy USDi, you will care about this number as well. This is the price index value defined relative to the base of 100.000 representing the average of the 1982-1984 price level. The index value of 323.048 tells you that the (quality-adjusted) price level has risen 223.048% since the early 1980s, slightly more than a tripling!
(As an aside, the BLS has an enormous number of NSA series for different subcomponents available. You can see and chart a lot of them here: https://data.bls.gov/dataQuery/find?fq=survey:%5Bcu%5D&s=popularity:D )
Now, the BLS reports this number just once a month, and in arrears. It was mid-August when they reported the July CPI referenced above. So we have two things we need to account for when we turn this into an index that USDi (or TIPS or inflation swaps) can track: 1. We have a monthly number, and we need a daily number – or in USDi’s case, one number every block, and 2. We have numbers for every month ending in July, but today isn’t July, so we need something for today. Let’s call the index value that we are going to construct, to use for TIPS/swaps/USDi, the “Reference CPI.”[1]
The second problem is handled in the simplest way possible: we just lag the data.[2]
So when we got the July data this month, we have the Ref CPI for October 1 (the 323.048 number I mentioned above). We already have the Ref CPI for September 1 (that was the June CPI, reported in July, 322.561). So now, we can straight-line interpolate the Ref CPI for any day in between those two dates, based on the number of calendar days in that month. So, the Ref CPI for September 2nd is:
1/30 * 323.048 + 29/30 * 322.561 = 322.57723
Voila, that’s just what the Treasury calculates for September 2nd, which isn’t surprising because that’s how math works.
Now, the only subtlety to USDi is that while TIPS and CPI swaps have one settlement per day USDi in principle is tradeable 24/7. That means that if we changed the Ref CPI for USDi just once per day, at 1 second before midnight every day you could buy USDi and then sell it at 1 second after midnight and get the entire day’s interest. That doesn’t seem fair. The blockchain is much closer to continuous settlement, so we have to interpolate not by day, but by block. On Ethereum (where USDi exists, initially), a block is roughly 10-15 seconds long, so USDi accrues interest basically every 10 seconds. The actual code for USDi looks at the block number and does the exact same calculation that we do above except that it is interpolating between the first block in September and the first block in October. You can get very close to the right answer by simply using spreadsheet NOW() functions, which in Google Sheets has 1-second precision. I do the approximate calculation for USDi on a Google Sheet here: https://docs.google.com/spreadsheets/d/1UnPzAu-U2zy5TEIcxgLBqkVP7QNtBJhwrwLnHt9EitM/edit?gid=0#gid=0
Let’s see, why did I want to calculate the Reference CPI? Oh, I remember: I want to find the price of USDi for a given time, in the past or present or any time up until (for now) the end of September. We have done all of the work except for the last step, which is to divide the current price level index – the Reference CPI – by the base price level index. For USDi, we defined the denominator as the December 2024 CPI. This is why we say that USDi is a dollar that preserves the purchasing power of a December 2024 dollar.
The December 2024 CPI was 315.605. Since the December 2024 CPI was also the Reference CPI for March 1st (see the handy drawing above), that means the value of USDi on March 1st was (drum roll) 315.605/315.605 = 1.000000. The value of USDi on October 1st will be 323.048/315.605 = $1.023583.
So the USDi coin is not a fund, nor a share of a fund. It is a time machine.
[1] The Reference CPI for TIPS and swaps is identical. The Treasury calculates them too, and reports them at https://treasurydirect.gov/auctions/announcements-data-results/tips-cpi-data/ (look for the PDF and XML files for the “Reference CPI Numbers and Daily Index Ratios Table.”)
[2] In principle, we could take the recent data trend and project to the current date, which would make it contemporaneous but lose accuracy…since when the inflation data is actually released, we will find out that method isn’t perfect. It would also be confusing, since on any given day in the past there would now be the actual CPI data and the previously-used projected-trend data. Since the importance of the exact timing of the price level diminishes with distance, while the two-index confusion would persist, the simple-lag method makes sense to me.
USELESS Coin vs Very Useful Coin
It is rare, in the investment world, for an investment to honestly and fully disclaim its basic nature in a way that finishes the story and requires no further analysis from us before making an investment decision. I have found such an investment. It is a cryptocurrency/meme coin called, appropriately, USELESS. https://coinmarketcap.com/currencies/theuselesscoin/ If you were to buy all of the USELESS in existence, it would cost you (as of this writing) about $272 million dollars. This seems to me to be a lot of money to pay for something useless, but what do I know?
Now, it should be noted that there are lots of useless coins. DOGE coin. Fartcoin. I could go on and on. But the difference here is that as far as I can tell, USELESS is being completely honest. It is not usable as a payment rail. It is not redeemable for anything, at any time, and therefore it is guaranteed to one day be worth zero. It doesn’t even come printed on a nice certificate so that the scripophiles can frame it and put it on the wall.
To be fair, as I said it isn’t the only such memecoin that is useless. It is merely the only one that turns that uselessness into a dare. It is a game, of seeing who eventually gets the ‘pride of place’ as top-ticking it, paying the highest price for something that is useless and that never pretended otherwise. (People who bought Enron stock were buying something that turned out to be worth zero, but they didn’t know it at the time. USELESS buyers are fully aware and cannot possibly claim otherwise.)
And actually, ironically, that unlocks the reason this coin exists. It reminds me of a fantasy baseball auction. For those of you who don’t play fantasy sports, there are generally two varieties: the ‘draft’ kind, where people take turns drafting players, and the ‘auction’ kind, where someone offers a player and a price they will pay for that player, from a limited budget allotment. The other participants in the draft all take turns bidding until someone wins the player, and then the process is repeated until every fantasy team is full. Done correctly, a bidder doesn’t merely bid for the players he or she wants but also bids up the price of a player he or she does not want, in order to force someone else to pay more than that player is worth. This part of the auction is a game, trying hard to make someone else pay top dollar – which requires you to figure out what everyone else’s top price is – while not getting stuck with the now-overvalued hot potato.
I think that’s what USELESS is. It’s a game of trying to push the price higher and higher, until someone is stuck with the honor of having paid the highest price for an utterly worthless unit. It’s a game; it’s only a game; and it is just as much of an “investment” as is the forty-two dollars you paid to select Juan Soto for your fantasy team.
Now, as you all know by now I have been at least partially converted and no longer think that all crypto is useless. The absolute opposite of USELESS is the enormous utility of our inflation-linked stablecoin, USDi. And yes, I’ve written about it before. And yes, I will write about it again. Because it’s as useful as it gets. There is no such thing as inflation-linked cash in traditional finance space. I am not aware of any bank that offers an inflation-linked savings account. And this is not a little thing. This is a big, big thing.
The chart below shows a hypothetical efficient frontier made up of a lot of different asset classes; this frontier might look a little different from what you’re familiar with because the x-axis and y-axis are in real terms whereas most of us learned finance in nominal terms where you had a Treasury bill as the risk-free asset. But we don’t care about nominal returns (if we did, we’d own stocks in the most hyper-inflating country we can find) – we care about real returns. In the nominal world, Tbills or money market funds exist with sub-zero real returns most of the time. More importantly, they have significant risk in after-inflation terms. As a result, in real space we are confined to the blue curve as our efficient frontier (the curve shows the lowest-risk portfolio that achieves a given expected real return. Remember these numbers are all hypothetical but the point I am making doesn’t depend on the numbers).
But USDi is, as I said, super useful. It is the origin security, the zero-real-risk, zero-real-return point. And that means that it improves every portfolio in real terms, with the possible exception of very-high-risk portfolios.
Now, most of these securities don’t yet exist in the defi world. There really aren’t any tokenized commodities yet, except in the narrow edge case of gold and one or two other single spot commodities – and no tokenized commodity indices yet, and commodity indices have additional sources of return beyond the spot commodity return. No tokenized TIPS, and few tokenized equities. Someday, the defi world will have these things. But what it does have right now, which is really useful and a good enough reason to visit the crypto world, is the low-risk security: USDi. How useful is that?
[N.b.: USDi was originally launched in a manner only available to accredited investors. However, because of growing regulatory clarity about its status as a stablecoin or currency rather than as a security, we have re-launched USDi so that the mint/burn functions are available to all. The coin’s address on mainnet is 0xAf1157149ff040DAd186a0142a796d901bEF1cf1. We will be adding functionality to allow minting or burning via user tools on our website, but in the meantime users can make a public call to the blockchain to mint or burn versus USDC. Reach out via the https://USDiCoin.com website if you want more information.]
