One of the longest running series on this site is market inflation expectations. We wanted to ease that math for us and you a bit, so we built this inflation expectations calculator.
In those articles we use two long running daily treasury reports – constant maturity treasury rates and real yields, and subtract them to give us an expectation of market inflation expectations over a certain period of time. In this article, we also make use of the amazing resource Quandl to filter and host the data.
With a one month lag (due to data formatting, not because we’re withholding anything), we’ve now built a calculator which automatically graphs inflation expectations up until the last trading day of last month. (If you’re looking for a past inflation calculator, we’ve got one for the CPI for any range of days since 1913).
Future Market Inflation Expectations
All numbers are annualized, in percent, over the next x number of years stated. Inflation is, of course, measured by CPI. This article updates every month automatically (so bookmark it).
(If you read this article in a reader, click through for the code)
How Does This Inflation Expectations Calculator Work?
The constant maturity yields and the real yields are linked by one factor – CPI.
The reason we know that this relationship exists? The Treasury literally tells us – by issuing products (like TIPS) which are inflation linked. Take the 30 year 8/30/2013 reported rate of 1.46%… 1.46% is your ‘real return’. If you bought that security, you would get 1.46% plus and CPI adjustments in the future.
Compare those to a non-inflation adjusted yield of 3.70% on 8/30/2013. If you expected inflation to be less than 2.24% a year? You’d buy normal treasuries. If you expected more? You’d buy TIPS.
The equilibrium value is the result when everyone in the market buys TIPS and non-adjusted securities, which gives us the inflation expectation of the market.
See, it’s like magic!
Is This the Best Method?
Probably not – and it’s not the one the Federal Reserve uses. If you are interested in a more hardcore inflation expectation methodology, read the Cleveland Fed’s paper “Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps“. The lay out a few methods which can also be used to forecast inflation (well, forecast it from the market’s perspective) including using swaps.
If that reading is too heavy for you, they also publish their data monthly, for all time frames between 1 and 30 years. Give that data a look.
(No comments on this inflation expectations calculator – wait for the weekender)