There's a busy economic indicator week on deck - GDP (with revisions) and unemployment being the headliners. With that said, we want to hit inflation again before those two controversial series make their debuts.
More Hints of Inflation
We mentioned in a couple articles now that we can sense a thawing labor market, and a return to inflation in the near 2% range - and the inflation release last week did nothing to knock us off those predictions. It seems that now, finally, after being told that things were looking up for some time now... there's a hint of a spark.
Witness last week's CPI release, putting us (for the third month in a row) right around that 2% Federal Reserve target rate:
Inflation (CPI-U) Through June, 2014
Now, a single economic release is certainly noisy (especially these monthly releases) - but a few in a row certainly starts to build the confidence. Now, the Federal Reserve doesn't use CPI-U, but even for their preferred indicator, the PCE, they're predicting increases. And, for their other predictions, improvements across the board - to the point of tightening starting sometime in late 2014 or 2015:
Fed June Minutes Central Tendency of Predictions
Market Inflation Expectations
A few high powered Federal Reservist predictions are great, but here on DQYDJ we like to ask the market what it thinks about future inflation. It's an easy enough calculation - we have automated inflation expectation graphing if you're willing to look at data on a month lag - but you take Treasury yields (assumed to be perfectly safe) and subtract real yields. Here's what you get:
Okay, well... not a lot of movement. But, as you can see, the market itself is pricing in around 2% inflation over the next few years - with very marginally higher inflation after that. (By the way, if you disagree with the above, you would buy TIPS if you thought inflation would be higher than predicted and regular treasuries if you thought it would be lower).
Since it's a bit hard to see, here's the numbers in an easy to digest form:
| Date | 5 YR | 10 YR | 20 YR | 30 YR |
| 07/01/14 | 2.00% | 2.26% | 2.33% | 2.35% |
| 07/02/14 | 2.01% | 2.26% | 2.35% | 2.34% |
| 07/03/14 | 2.03% | 2.28% | 2.37% | 2.37% |
| 07/07/14 | 2.01% | 2.27% | 2.35% | 2.36% |
| 07/08/14 | 1.99% | 2.27% | 2.35% | 2.36% |
| 07/09/14 | 1.98% | 2.29% | 2.36% | 2.38% |
| 07/10/14 | 2.00% | 2.28% | 2.36% | 2.38% |
| 07/11/14 | 1.99% | 2.28% | 2.37% | 2.37% |
| 07/14/14 | 1.99% | 2.27% | 2.36% | 2.37% |
| 07/15/14 | 1.96% | 2.25% | 2.35% | 2.36% |
| 07/16/14 | 1.95% | 2.23% | 2.33% | 2.35% |
| 07/17/14 | 1.97% | 2.23% | 2.33% | 2.34% |
| 07/18/14 | 1.96% | 2.24% | 2.33% | 2.34% |
| 07/21/14 | 1.97% | 2.24% | 2.34% | 2.34% |
| 07/22/14 | 1.93% | 2.23% | 2.32% | 2.33% |
| 07/23/14 | 1.92% | 2.23% | 2.32% | 2.33% |
| 07/24/14 | 1.93% | 2.27% | 2.42% | 2.35% |
| 07/25/14 | 1.95% | 2.28% | 2.37% | 2.36% |
There You Have It
The market is expecting smooth sailing on the inflation front, and has seemingly accepted the 2% target given by the Fed.
Enough about the market, though, how about you? Where do you see inflation going over the next few months, years, decades?
Whew... now with inflation out of the way, we can stay tuned for the real fireworks - we'll see you again when we know about GDP and unemployment.
