One series we keep a careful eye on here at Don't Quit Your Day Job... is Treasury Breakevens. By subtracting the real yield on inflation adjusted securities from the yield on nominal government securities, you're left with market inflation expectations.
That means from a couple screens on the Treasury Department's website you can see the current market expectations for annualized CPI. Nifty, eh?
Inflation Expectations through 6/27/2017
We pulled down the yields last night and saw something interesting - inflation expectations have trended down to sub 2% for every timeframe in 5, 10, 20, and 30 years. Here's how it looks:
Market Inflation Expectations through 6/27/2017
The beginning of President Trump's term saw an increase in expected future inflation. We peaked at 2.16% annual expected CPI on February 15, 2017. We're now all the way back down to 1.83% for 30 years - or a reset back to levels seen in October, 2016.
| Date | 5 Years | 10 Years | 20 Years | 30 Years |
| 06/27/17 | 1.62% | 1.71% | 1.76% | 1.83% |
What's Going On With Inflation Expectations?
One plausible explanation for the decrease in inflation expectations is due to Federal Reserve Policy and the federal funds rate. So far this year, the Fed has increased the rate twice, and it is now sitting at 1.00% to 1.25%. Perhaps the move off 0% is enough to head off the slight move up in expectations, and investors are convinced things won't heat up too quickly. Since this series is forward looking, it also means the market thinks the Fed has inflation licked, and will react in time if it ticks up again.
Of course, if you're of the opinion things are already overheated and overvalued you'll probably disagree. (I support this viewpoint more or less - but I'm biased living here in the Bay Area. Seems a bit overheated... to say the least.)
Another, perhaps even better explanation is the recent decrease in oil prices. With both Brent and WTI trading below $50 a barrel, projecting those rates forward means not much inflation from energy.
Something else? Tech disruption? Generational change? You tell me what you think - that's what the comment section's for down below.
