One of the interesting things you can do with Treasury yield data is get a feel for what the markets expects to see in terms of inflation over the next thirty years or so. By subtracting real (read: after inflation) yields on inflation protected securities from the yield on non inflation protected securities, you can see the premium suggested for the inflation component - that component is the annualized rate of inflation expected by the market.
This revelation isn't a new theme on the site - we've visited it often, and we even have a calculator which automatically calculates various inflation premium breakeven rates for you (of course we do, right?). However, we like to revisit the math whenever we start to see something 'interesting' happening - and interesting is how to best describe the recent data. We'll explain.
Trusting the Federal Reserve
The Federal Reserve aims to shape monetary policy in such a way that inflation averages 2% year over year. Sure, they target the PCE, or Personal Consumption Expenditures gauge of inflation - but it should mostly match the CPI, which is what we are measuring predictions for with this math. Here's what market predictions for future inflation looks like over the last month:
That's right - in the last week, the market started pricing in over 2% inflation over the next 20-30 years (for the first time since November of last year). This started before the statement on the 29th, too, mind you.
I know it doesn't look like a huge deal, but it's more obvious when you see the chart:
| Date | 5 Year | 7 Year | 10 Year | 20 Year | 30 Year |
| 04/01/15 | 1.58% | 1.69% | 1.80% | 1.84% | 1.87% |
| 04/02/15 | 1.56% | 1.68% | 1.81% | 1.86% | 1.89% |
| 04/03/15 | 1.58% | 1.69% | 1.83% | 1.88% | 1.91% |
| 04/06/15 | 1.60% | 1.71% | 1.85% | 1.88% | 1.91% |
| 04/07/15 | 1.60% | 1.72% | 1.85% | 1.89% | 1.92% |
| 04/08/15 | 1.58% | 1.69% | 1.84% | 1.87% | 1.90% |
| 04/09/15 | 1.59% | 1.70% | 1.84% | 1.89% | 1.93% |
| 04/10/15 | 1.56% | 1.66% | 1.82% | 1.87% | 1.91% |
| 04/13/15 | 1.55% | 1.66% | 1.80% | 1.86% | 1.90% |
| 04/14/15 | 1.55% | 1.66% | 1.80% | 1.85% | 1.89% |
| 04/15/15 | 1.59% | 1.69% | 1.84% | 1.88% | 1.91% |
| 04/16/15 | 1.58% | 1.67% | 1.85% | 1.90% | 1.93% |
| 04/17/15 | 1.65% | 1.75% | 1.89% | 1.94% | 1.97% |
| 04/20/15 | 1.60% | 1.70% | 1.89% | 1.95% | 1.97% |
| 04/21/15 | 1.59% | 1.69% | 1.86% | 1.93% | 1.95% |
| 04/22/15 | 1.60% | 1.71% | 1.87% | 1.94% | 1.96% |
| 04/23/15 | 1.70% | 1.71% | 1.89% | 1.95% | 1.97% |
| 04/24/15 | 1.71% | 1.68% | 1.89% | 1.96% | 1.98% |
| 04/27/15 | 1.71% | 1.73% | 1.91% | 1.97% | 1.98% |
| 04/28/15 | 1.69% | 1.71% | 1.89% | 1.95% | 1.97% |
| 04/29/15 | 1.70% | 1.69% | 1.92% | 1.97% | 2.00% |
| 04/30/15 | 1.72% | 1.76% | 1.94% | 2.01% | 2.03% |
| 05/01/15 | 1.72% | 1.78% | 1.94% | 2.03% | 2.04% |
Liquidity and Pricing
Now, as we've mentioned before, this is just a rough cut at market expectations - the Federal Reserve (and economists elsewhere) note that this data isn't entirely accurate because of various reasons. The Federal Reserve has its own various measures of inflation expectations - some examples being a survey of forecasters at the Philadelphia Fed, inflation 'nowcasting' at the Cleveland Fed, and business inflation expectations at the Atlanta Fed.
Keep that in mind before putting your complete trust and faith in the numbers, but note that they are a very good rough cut and instant feedback for your own planning purposes.
We'll have an example of one practical application for these inflation expectations in your own finances - evaluation of various forms of credit (we'll look at mortgages and car loans) later this week.
