CLINTON AIRS PLAN TO SELL INFLATION-PROOF BONDS.

Byline: Peter Slevin Knight-Ridder Tribune News Wire

President Clinton announced the creation of a new government bond Wednesday that will guarantee investors an annual profit regardless of rising consumer prices.

Designed for investors wary of the stock market and satisfied with a modest but certain return, the Clinton administration hopes the Inflation Protection Bond will encourage a spendthrift society to put more money into savings.

Clinton's announcement, targeted to middle-income Americans, is the latest in a series of small-scale initiatives designed to impress voters wary of grand campaign promises.

The 10-year, anti-inflation bonds will go on sale Jan. 15 in minimum denominations of $1,000, although the government expects investment houses and mutual funds to offer chances to purchase the bonds in smaller amounts.

Clinton said the government also plans to offer similar savings bonds in denominations as low as $50 starting in January 1998. He said people are likely to be able to buy them through payroll savings plans.

To encourage savings and increase educational incentives, Clinton also said he will seek legislation expanding people's options in spending the proceeds of savings bonds without paying taxes on the profits. He would include vocational schools, for example, not only conventional universities.

A government bond pegged to the rate of inflation is an idea in existence since at least the 19th century. The idea has been discussed in this country for decades. Britain has sold such bonds for 15 years, Canada for five.

The typical federal government bond sold now in the United States has a yield of, say, 7 percent or 8 percent, which is several points higher than the rate of inflation, now averaging about 3 percent. It is a good deal, if inflation remains low.

If prices rise, however, as they did in the late 1970s when the inflation rate reached high into double digits, government bonds at 7 percent would be a poor investment.

Clinton's inflation-indexed bonds remove that risk. The government would adjust the value of the initial investment, or principal, for any increase in inflation. The effect is to guarantee that investors receive the return they originally expected.

Treasury Secretary Robert Rubin, appearing with Clinton, said the January offering of bonds will be ``small.'' He predicted, however, that the idea is ``going to be very big.''

Republicans criticized the move as an election-year gimmick that could increase the government's borrowing costs. But administration officials said inflation-protection bonds are a bipartisan idea, promoted by former Vice President Dan Quayle when he was a Republican senator from Indiana.