It's been a long time since we've turned our eyes to expectations of inflation, but we're here today to do that very thing. Finally. Or something like that.
Using The Treasury Yield Curve
The simplest way to gauge inflation expectations is a classic - merely take the long term rates for long dated treasuries and subtract the real yields offered by inflation protected securities. Remember, inflation protected securities will pay the rate plus whatever inflation happens in the meantime. Here's a graph of how that looks over the month:
| Expected Inflation on Date | 5 Yr | 10 Yr | 20 Yr | 30 Yr |
| 05/01/14 | 1.96% | 2.20% | 2.30% | 2.31% |
| 05/02/14 | 1.95% | 2.19% | 2.30% | 2.31% |
| 05/05/14 | 1.92% | 2.18% | 2.30% | 2.30% |
| 05/06/14 | 1.91% | 2.16% | 2.28% | 2.29% |
| 05/07/14 | 1.92% | 2.20% | 2.40% | 2.29% |
| 05/08/14 | 1.93% | 2.19% | 2.29% | 2.32% |
| 05/09/14 | 1.92% | 2.18% | 2.29% | 2.32% |
| 05/12/14 | 1.91% | 2.18% | 2.28% | 2.30% |
| 05/13/14 | 1.89% | 2.16% | 2.27% | 2.30% |
| 05/14/14 | 1.92% | 2.17% | 2.27% | 2.30% |
| 05/15/14 | 1.96% | 2.19% | 2.29% | 2.32% |
| 05/16/14 | 1.94% | 2.18% | 2.29% | 2.31% |
Cleveland Fed Style
The method I just shared is good for a quick glance, but for various reasons (here's one: taxation on treasuries and inflation protected treasuries) isn't always accurate. The Cleveland Federal Reserve details a different methodology in a working paper, which gets into all of the gooey economic details for picking a different style - but lucky for us, they also expose that data for us to grab manually.
| Expected Inflation on Date | 5 Yr | 10 Yr | 20 Yr | 30 Yr |
| 1/1/2014 | 1.71% | 1.85% | 2.05% | 2.18% |
| 2/1/2014 | 1.63% | 1.77% | 1.98% | 2.13% |
| 3/1/2014 | 1.57% | 1.74% | 1.98% | 2.13% |
| 4/1/2014 | 1.74% | 1.88% | 2.07% | 2.20% |
| 5/1/2014 | 1.75% | 1.87% | 2.06% | 2.19% |
(Note that the timeframe is different for the two sets - only May is comparable).
Inflation has been Low, is Low, and We Expect it to always Be Low...
So there you have it - the best that the big brains at the Fed have to offer, combined with a finger in the air of the quick and dirty method. I apologize for waiting so long between inflation articles - I'll inflate my output so I actually do these at least once a month.
So, do you think the market is right? Wrong? What do you plan to do about it?
