Wednesday, April 14, 2010

Treasury Spread Shows No Signs of Inflation

The spread between nominal 10-year treasuries (data) and 10-year TIPS (data) has increased slightly over the last few months, to the current level of 233 basis points as of April 9. But the current spread is still below the 250 basis point average during 2004, 2005, 2006, 2007 and the first half of 2008. This market-based indicator of expected inflation is a little higher than the 1.9% consensus of the WSJ forecasters. At least by this Treasury bond-market derived estimate of future inflation, there don't appear to be any inflationary pressures building.


14 Comments:

At 4/14/2010 11:08 AM, Anonymous morganovich said...

historically, this measure is not that great a predictor of inflation.

look at 2006:

250 bp spread, 4% CPI. on a % basis that's an awfully big variance. 2004-5 were a bit better, but still well off.

this measure seems to systematically underestimate inflation.

 
At 4/14/2010 11:41 AM, Blogger Benjamin Cole said...

Morganovich-forget inflation, it is dead for three years at least.

The Asian economy is booming, Europe is growing. The USA is a laggard, but we are out of the recession. No double dip ahead.

When do you give up the doomsaying? SoCal home sales perking up.

 
At 4/14/2010 12:12 PM, Anonymous morganovich said...

ben-

i'm not doomsaying.

i think we are going to have some moderate growth, but it's going to be more of a muddle through and a slow recovery, not a strong one. we are nothing like out of the woods. there are some strong negative currents as well as "green shoots".

i was also not making an inflation prediction, merely showing that this TIPS spread is not actually a good predictor.

it (like the VIX) does not wind up meaning what DR perry seems to think it does.

 
At 4/14/2010 12:41 PM, Blogger Marko said...

By the time we see it showing up, I think it will be too late to stop it. Just like last time when we had housing cost inflation. Wonder what it will be this time?

 
At 4/14/2010 1:14 PM, Anonymous gettingrational said...

PIMCO says take advantage of price weakness in TIPS and buy. The article states for the next year inflation probability is low and this is reflected in Treasury Inflation Protected Secrutities. In the next few years inflationary forces begin to build.

 
At 4/14/2010 3:30 PM, Anonymous Junkyard_hawg1985 said...

Would this chart constitute a "V" on inflation?

As a minor correction, the title is "no signs of inflation" when in fact, it is predicting 2% inflation. It may not sound like much, but over a lifetime, money will lose more than 3/4 of its value at 2% inflation.

 
At 4/15/2010 12:14 AM, Anonymous Lyle said...

I keep hearing predictions inflation is coming, its sort of like saying there will be an earthquake in LA. True but not very useful. Yes sometime inflation may take off again, but clearly not the next couple of years. Beyond that who can say. The tips indeed show no signs for an extended period. The way I look at it the more people that say inflation is just around the corner the further away it actually is. Watch out when no one expects inflation because then it will happen.

 
At 4/15/2010 5:39 AM, Blogger juandos said...

There's always inflation, sometimes it isn't as rampant as it can be...

 
At 4/15/2010 10:06 AM, Anonymous Junkyard_hawg1985 said...

"There's always inflation, sometimes it isn't as rampant as it can be..."

Juandos, I disagree. The inflation rate for the United States between 1800 and 1900 was slightly negative. I think this is a long enough period to qualify as statistically significant. During this time period, we also had excellent economic growth. Money at that time had intrinsic value (gold). The government could not just go and print more of it like they can today.

The key function of money is to serve as a store of value. Inflation undermines this role.

 
At 4/15/2010 10:20 AM, Blogger juandos said...

"The inflation rate for the United States between 1800 and 1900 was slightly negative"...

Really?

 
At 4/15/2010 12:26 PM, Anonymous Junkyard_hawg1985 said...

Juandos,

You link shows that the CPI index in 1800 was 50. In 1900 it was 25. This means that over the 19th century, prices on average fell in half. This means the average cumulative average annual inflation rate was -0.7%. This is what I define as slightly negative.

 
At 4/16/2010 9:24 AM, Blogger juandos said...

"You link shows that the CPI index in 1800 was 50. In 1900 it was 25"...

Well Junkyard_hawg1985 I was thinking that maybe just maybe there really isn't a very good comparison between the 2 different centuries...

Why?

This: What Was the Consumer Price Index Then? A Data Study

Mind you I could've easily misunderstood what I read in that study...

 
At 4/16/2010 10:20 AM, Blogger Junkyard_hawg1985 said...

juandos,

I agree that the CPI numbers for the 19th century were not very accurate as your link shows. While the accuraccy was poor, prices did fall during the 19th century across the board. This was mostly due to industrialization, better shipping (i.e. railroads & canals), and a better developed economy. If Mark Perry had been around in 1900, he would have been showing charts of how food prices, energy prices and clothing prices had been falling for the previous century. Our standard of living rose while these prices were falling.

 
At 4/16/2010 4:44 PM, Blogger juandos said...

"If Mark Perry had been around in 1900, he would have been showing charts of how food prices, energy prices and clothing prices had been falling for the previous century. Our standard of living rose while these prices were falling"...

O.K. Junkyard I see where you're coming from...

Thanks...

 

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