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Inflation Expectations in June, 2019

June 9th, 2019 by 
PK

Don't look now - inflation expectations are getting interesting again.

Last year, inflation expectations as measured by the difference between inflation adjusted securities – TIPS – and nominal treasuries floated around 2-2.15% for 5-30 years. As of today, those time-frames predict 1.61% annually over the next 5 years and only up to 1.81% over the next 30.

(Somewhat) Closely Monitoring Inflation Expectations

Previously, we used to check in on inflation expectations once a month here on DQYDJ.

Frankly... it got a bit boring.

The Federal Reserve and/or other actors in the economy convinced investors that the economy was on track for targeted 2% inflation. You can only write about well behaved indicators for so long.

For essentially all of 2018 – and really dating back to mid-2016 – inflation expectations on the 5-year breakeven were closer to the 2% target than they are today.

Inflation expectations between January 2018 and June 2019
Inflation expectations from the beginning of 2018 until today.

Outside of a few dips in 2017 and the swoon in October-November, we're now challenging the lowest expectations we've seen under President Trump.

DATE5 YR Expectations10 YR Expectations20 YR Expectations30 YR Expectations
6/3/191.56%1.73%1.80%1.81%
6/4/191.59%1.74%1.83%1.83%
6/5/191.59%1.75%1.84%1.85%
6/6/191.58%1.73%1.82%1.82%
6/7/191.61%1.74%1.80%1.81%

To read these: X% a year over the next Y years.

Since 5 year TIPS are the most volatile in the series, here's a chart looking at their performance over the last 20 years:

So, everything has fallen – real and nominal.

Inverted Yield Curve and Dipping Inflation Expectations

We've talked a bit about the inverted yield curve here on the site. As it turns out, the 2 year 10 year still isn't inverted, while the more important 3 month 10 year remains awkwardly inverted.

(If you're looking to refinance 3 year to 10 year ARMs are tempting. Also, Bay Area house prices have stalled which is... a thing.)

Throw the behavior of Treasury break-evens (they aren't the best measure of inflation, but good for a quick measurement) on top? Count your humble host as wary about the economy's prospects for the rest of 2019.

Convince me otherwise in the comments - how do you see the rest of 2019 playing out?

Don't Quit Your Day Job...

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