Betting on Inflation: 2009 Inflation Expectations

July 28th, 2009 by 
PK
In an earlier article, I detailed how you could check on inflation expectations using information publicly available from the Department of the Treasury.  Using the data they provide, it is simple to calculate the market's expectations for inflation over the next 5, 7, 10, and 20 Year periods.  Let's take another look not at the 2009 inflation rate, but the expected inflation rate of the future viewed through '2009' colored glasses.
The Calculation

If you want to run these numbers yourself, take a look at the data set for treasury yields here and for real yield here.  Take the difference between the treasury yields and the real yield (the post inflation adjustment yield in TIPS) for whatever date range you feel like examining.  You will be able to run your own calculations on some very interesting data.

The Eye Candy

Inflation Expectations Over the Next 5, 7, 10, 20 Years
Inflation Expectations Over the Next 5, 7, 10, 20 Years

Note that expected inflation over the four available periods peaked in early June, contracted, and has recently peaked slightly.  More interesting is the following chart, which looks at the spread (in percentage points) of inflation expected in the 5-10 year and the 10-20 year period.

20 - 10 and 10 - 5 Year Inflation Expectation Spread
20 - 10 and 10 - 5 Year Inflation Expectation Spread
Five times this year more inflation has been expected in the period from 2019 to 2029 than from 2014 to 2019.  Looking for an explanation?  Here are the Google Trends links for the last four dates the spread crossed over:

See anything?  Nothing good in my mind.  Just thought it would be interesting...

And the Public?

For my final graph, I present to you this interesting chart from Google Insights.  This graph details the interest in 'inflation' as a search term on Google (narrowed to just the United States).

Google Trends Inflation Interest
Google Trends Inflation Interest

Strange.  There doesn't seem to be any correlation between expected inflation and the interest in inflation from my proxy for the general public.  There's some food for thought...  What do you think?

      

PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

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