Every few months, we here at DQYDJ like to check in on the market's expectations of inflation. There are lots of variables in the market - not least of which is the ending of the Federal Reserve's open market purchase of bonds known as Quantitative Easing 2.0. Still, even with the conflicting signals of historically high gold prices, ridiculously low mortgage prices, and out of control commodity prices, the market isn't pricing out of control inflation. As a matter of fact, the inflation that it is pricing in is decently low. Enough rambling, let's take a look.
Calculating Inflation Expectation
We're going to use our previous version of measuring inflation, taking the difference between the Daily Treasury Yield Curve Rates and the Daily Treasury Yield Curve - the difference is the market's expectation of inflation, since the point of TIPS is to pay the holder back with a yield on top of inflation. Let's look at two dates - 9/21/2010, the start or QE, and the last data available - 5/27/2011.
Market Inflation Expectations
And there you have it, the market is pricing in 2.44% inflation annually over the next 30 years. So, what do you think? Is the market ignorant of coming hyperinflation? Is the market ignorant of coming deflation? Or is the porridge just right? Let us know in the comments!
