Inflation expectations in the bond market

While gold continues powering upwards the US Treasury market is not confirming similiar concerns about inflation.  (If gold is climbing due to uncertainty regarding the entire paper fractional banking monetary system is another matter)  Looking at the comparative yields of nominal versus inflation protected bonds (called TIPS) issued by the US treasury is illuminating. 

As you can see inflation expectations in this market are actually lower now than before this crisis erupted in 2008.  If the bond market was truely concerned with inflation you would see the implied breakeven inflation rate go up, not down. 

Inflation update

A little inflation update for you.  The CPI inflation numbers and its various components were released today.  Click on the picture at right to examine three sections of the inflation number:

The graph is of  year over year percentage change to reduce seasonal fluctuations. 

CPI for all urban consumer in blue

CPI less food and energy in red

CPI housing component in green

Both headline CPI and the housing component are in negative territory (that's deflation folks) and the CPI less food and energy continues the slow drop towards zero.  The housing component has never been negative until this current recession since the data series began in 1967.

Long Term Interest Rates at juncture

Long term interest rates in the form of the etf TLT (20+ year U.S. Treasury bonds) is at an interesting jucture.

As you can see from these charts by Freestockcharts.com it is approaching a long term overhead resistance as shown by the white line. Each time TLT has reached this area it has eventually gone lower. Will it do so again?

Hugh Hendry and Eclectica fund August 2009 commentary

I ran across Hugh Hendry a several weeks ago and enjoy his irreverant style.








The Great Debate right now is inflation versus deflation and Mr. Hendry falls in the deflation camp.

Here's the August 2009 Eclectica commentary which he manages.

Hugh Hendry is also very bearish on China.





Mr. Hendry's positions are quite contrary. How many of his predictions come true will be interesting to observe.

Inflation - Numbers to live by

Not since the 1950's have we had deflation in America. Right now 'headline' inflation is running greater than negative 1% (thats deflation folks) and looks to accelerate downward.


Will we have consistent deflation for a long period of time? I don't know but lets examine some of the factors that go into inflation.



I am focusing on 3 charts; all show data on a year over year basis to remove seasonal fluctuations.


While headline inflation is decidedly negative right now, the 'core' inflation rate is still positive. 'Core inflation' excludes energy and food prices from the calculations. Some may argue one still needs to eat and drive your car to work so why look at a number that excludes these important parts of daily life? Since energy and food prices are highly volatile the theory is they will balance out over time and policy decisions (like raising short term interest rates) should not be based upon such volatile factors.

As you can see we still have inflation within the 'core' but the rate is sloping downwards. If / when this drops below zero and we have 'core' deflation it will hopefully make the news! Core inflation has not dropped below zero in the entire time it has been sampled. (since 1957)


Housing costs are also part of the inflation figure and as you can guess it is also trending downwards and may also start going negative in the near future. Housing inflation has not been negative in the entire data set as well. (since 1967)


Most Americans alive today have not had to deal with chronic deflation and I believe we are culturally programmed to only think in inflationairy terms. Life may get very interesting if the US consumer changes their mindset to one of chronic deflation instead of inflation.


Additional Reading:
WSJ: Worldwide deflation
Bloomberg: High real interest rates attracting interest

Source: Federal Reserve