Every once and a while I like to check in on the market’s inflation predictions. This is for my own personal curiosity, and possibly to entertain you, dear reader. You’ll be interested to know that inflation expectations have tempered somewhat over the last few weeks; it all goes to show that throughout all of the howling on raising debt ceilings and mudslinging in politics, the market still believes in the general stability of the United States dollar. My method is the classic “subtract real treasury yields from the yield curve rates”. All information is available at the U.S. Treasury’s web site.
Inflation Expectations, 5, 7, 10, 20 Years Out
Expected Inflation, 2010 (US Treasury)
Note that the bond market was predicting less inflation at the end of January, but inflation expectations have started to creep up again. The graph shows the expected annual geometric mean of inflation, meaning that the market is predicting that the next 20 years will have a geometric mean of 2.53% inflation. Put another way, the market expects that something that costs $1.00 today will cost $1.65 in 20 years. Speaking of the yield curve, take a look at how it looks currently:
- Treasury Yield Curve for 2/3/2010 (US Treasury)
This is a healthy yield curve; progressive maturities yield a greater amount. Flatter (or non-rising!) yield curves portend a slowdown of economic activity. This yield curve suggests relatively smooth sailing. For your viewing pleasure, I present a yield curve I’ve shared before, from January 2, 2008:
- Treasury Yield Curve, 1/2/08 (US Treasury)
We all know how that turned out!
Anyway, our current curve is healthy, and using this method to predict inflation suggests rather low inflation for the foreseeable future. What are your predictions? Let me know in the comments!
