In this shortened workweek, we move our attention to the recent ‘breakdown’ of inflation expectations, or as they have taken to be called in the financial media, “break-evens”. For an explanation of that term, I’ll point you to the audio version of yours truly (on the Stacking Benjamins Podcast) discussing how various securities can reveal the market’s inflation expectations.
Anyway, the reason we are turning back to this topic? Even with improved employment, we’re still waiting for wages to take off in earnest – and, by theory, increasing wages are an inflationary pressure. Since break-evens have actually fallen recently, we turn our eyes to the drop!
Inflation Expectations Over 5, 10, 20, and 30 Years.
To reproduce this chart, either search breakevens on FRED, or go straight to the source at the US Treasury and subtract real yields from the Treasury yield curve. Since inflation protected securities will pay off plus inflation, that hidden inflation variable is what is revealed using this method.
Here’s what inflation expectations have done this month:
Okay, maybe that’s a little scary to see everything tilt back towards the deflation side. Of course, we’re only looking at a brief snapshot… let’s see if a longer history does anything for us!
Sure, we’re cheer-leading a recovery at this point – but we’re seeing inflation expectations we haven’t seen since… 2003.
Now, obviously, this series doesn’t go back long enough to draw any meaningful conclusions… but a slow downhill decline (which can hopefully be arrested) is much better than the cliff we fell off in 2008.
And, hey, the market is expecting less inflation in the midst of what seems to be a strengthening recovery. Let’s monitor it but not panic yet, eh?
How much money is under your mattress? Are you worried about inflation coming in incredibly low the next five years? What’s the ideal rate of inflation in an advanced economy? ow will this affect your investing?