Inflation: Where Are You?

It’s officially been 196 days since we published our epic post about how the spectre of inflation… well, hasn’t appeared.  Our articles on inflation in general (like this defense of low to moderate inflation or this piece on the true inflation rate) seem to go against the grain of some corners of the web – but a fact remains… inflation is the least of our concerns in the near future.

And what makes us so smart when it comes to predicting the future?  Well, the combined votes of millions of market participants, of course!

Raising a Finger to the Wind

Tonight we used the classic method of getting a feel for inflation expectations – we took the constant maturity treasury rates as reported by the US Treasury and subtracted real yields.  This works because the two rates are linked by a single factor – future reported CPI.  This means that any gap between the two is set by market participants who have collectively decided how much that spread should be.

Here’s what it looks like, in practice:

Click me.

Click me.

What About Hyperinflation?

If a black swan is defined as an event which no one sees coming, I suppose hyperinflation wouldn’t fit the definition.  There are, of course, plenty of people who expect a large shock to our currency – perhaps the Fed acting too slowly to mop up excess liquidity or velocity, or perhaps the Fed ceasing their payments to bank reserves held on their books (which, yes, is hurting people who have savings accounts.  But by all means, keep arguing for emergency funds!).

Or, zombies.

However a hyper-inflationary period would start, it isn’t on the collective radars of the market.  That doesn’t mean we won’t have disproportionate price increases in some sectors (like, say, Bay Area real estate) or even bubbles… but it does mean hyperinflation is still extremely unlikely.  Here are the prevailing market expectations as of September 4, 2013:

Date 5 Yr 10 Yr 20 Yr 30 Yr
09/04/13 1.74% 2.07% 2.23% 2.22%

That means that over the next 5 years, the market is expecting a geometric average CPI of 1.74%.  Note that as of today, inflation expectations over 30 years are actually less than over 20 years.

Where Do You See Inflation Clocking In?

So, do you agree with the prevailing wisdom?  Do you think we’ll see a period of stability?  Can any 20 or 30 year prediction ever bear fruit?

If I find time, I’d like to try to encode this data into a dynamic calculator/chart type application.  If that sounds interesting, let me know in the comments.


  1. says

    I don’t see hyperinflation as a threat. I think the Fed has made it pretty clear that they will act defensively to protect the economy, and this would be a pretty major threat that they would act against. I think low inflation is on the horizon, but there’s also a flatline in purchasing power since wages for the middle and lower class have largely remained flat or even declined over the past decades.

    • jackaz says

      I agree with you that hyperinflation is unlikely. The problem is that hyperinflation is nit a supply problem – something the Fed can control – but is rather a velocity problem – something which a central bank cannot control. There is no science to determining the exact point where inflation kicks over into hyperinflation. It is – as much as anything – a psychological phenomena.

      I must take exception to your characterization that the Fed will defend the economy. That is flatly not true. The Fed will defend the Too Big To Fail banks. The rest of the economy is free to burn to the ground.

  2. krantcents says

    Inflation based on the Fed’s formula is very low, but that is artificial! Real inflation is based on the prices the average consumer has to pay. Transportation costs has infiltrated everything we buy.

    • says

      I can’t quite get behind that first statement – truth is, some things (health, education) have gone up more than the ‘average’ across all commodities, but other things haven’t. Like, say, gasoline, natural gas, and oil. Those costs are down since the recession started.

      • jackaz says

        I believe it can be demonstrated fairly conclusively that the market price of everything the government subsidizes has risen well above the inflation rate. Amongst the items most heavily subsidized in the last 30 years is education. In 1982, I was paying – if I recall correctly – $65/credit hour for a private education. According to the DQYDJ inflation calculator, that’d be about $157/credit hour in today’s money. But reality is nowhere close to that. Arizona State University, (my home town “college”) advertises that tuition is at least $460/credit hour – for a STATE school. (The university I attended is now at least $800/credit hour.) What’s changed? Massive government subsidies have resulted in demand inelasticity for higher education.

        • says

          Exceptions that prove the rule? Meat and high fructose corn syrup.

          Of course, that makes some veggies and all sugar more expensive, but at least I can get cheap steaks!

    • says

      I read the article, but I can’t get behind the arguments presented. For one, both Krugman and Friedman are misrepresented in the piece. Friedman’s views on monetary policy are way more nuanced than presented, and his view of the problems with monetary policy during the Great Depression pretty much set the playbook for Bernanke – another Great Depression scholar.

      • Vincent Cate says

        My only mention Friedman in my Hyperinflation FAQ is to quote his “inflation is always and
        everywhere a monetary phenomenon”. He did say that, so I don’t see how I am misrepresenting his views. Looking over what I say about Krugman I also can’t tell what you would object to. Can you be more specific?

        • says

          First, I’d say this about what you said in (the other) PK’s section: large deficits are necessary, but not sufficient. I don’t think you thoroughly rebut the Japan experience here.

          As for velocity, you’re correct that a velocity increase and a money supply increase without a corresponding increase in the real value of expenditures is inflation. Thus, a large dM and dV without a correspondingly high dQ would be, well, large inflation. This section: “What causes the velocity of money to slow down or speed up?” is questionable.

          I’m not saying hyperinflation is impossible in the United States. I’m saying that it’s not likely under current conditions… like, say, the falling velocity since the 80s. Our country does still have the political will (a sufficiently independent Federal Reserve and a reasonable enough Congress) to avoid monetizing the debt completely, and our main problem was the deflationary threat in the recent past.

          • Vincent Cate says

            I’m not saying hyperinflation is impossible in the United States either, so maybe we agree. :-) I think there is a really high chance of hyperinflation in the next couple years in Japan. What do you think?

          • says

            I don’t see it happen – and, expansive monetary policy aside, I’ll make a demographic argument –

            1) Japan saves more money than us, in aggregate
            2) Japan is older than us

            There is a limit on how much an aging population can even spend when they no longer work – selling pressure on their stock market (it’s an ugly graph) and other securities is more apt to cause deflationary pressures. Hence, the < 2% inflation and the "lost decade(s)".

            We are way closer to the Japan experience than people care to admit, what with the aging boomers and all.

            So, again, I won't say impossible – just improbable, haha.

  3. Andy Hough says

    My personal rate of inflation has been pretty low. I expect that inflation will remain low, but there is no way to know for sure.

  4. AvgJoeMoney says

    I, too, have been amazed by the “soft landing” that we’re experiencing. Earlier it seemed like nobody expected that to continue, but now I’m reading more and more “experts” expecting a smooth ride to higher interest rates with inflation in check.

    • says

      Yep, the biggest wildcard is the “Taper” – but rising interest rates don’t necessarily mean higher inflation. Rising rates are actually a sign of a recovering(/recovered) economy, as money starts to flee fixed income into higher earning asset classes.

  5. says

    It seems in the popular press that the majority are now expecting us to avoid any significant increase in inflation, but rather it increasing slowly in line with interest rates.

    However, that all seems a little rosy!!

    • says

      I’m sure there will be some hitches – sort of like that weird drop in inflation between 20 and 30 years, eh? However, like I mentioned to Joe, riding interest rates don’t necessarily portend higher inflation. It’s possible for rates to rise, hopefully without bubbles being blown in other assets.

  6. jackaz says

    Two comments:

    First: the “smart money” blew up the economy in 2008. The only reason Goldman Sachs are still in business today is because (a) .Gov bailouts and (b) regulators only punish misdemeanors. The felons get a pass because the felons have the big bucks.

    Second: There seem to be a zillion meanings implied when people use the word “inflation.” When I talk about it, I try to use the qualifier “monetary” to make it clear that I mean “monetary inflation.” With that in mind, the fact that the Fed has monetized about $4B in debt in the last 5 years implies that we already have monetary inflation. It hasn’t sloshed out into the broad economy because that money is parked in the overnight accounts of the Fed’s member banks. And why is that? Because the TBTF banks are still close to insolvent without those reserves. It’s not getting better, Finance Sector stock prices notwithstanding.

    This “soft landing” stuff is sheer fantasy. More Americans than ever are on some form of government assistance. The unemployment rate has barely budged lower in the last 5 years, and is as low as it is only because the calculation drops people who haven’t found a job in 18 months. Of those reported “employed”, many are now underemployed, (part-timers), who used to be fully employed.

    Sorry, I think I went off on a rant there.

    • says

      For a full take on my inflation thoughts, have you read my post “Where’s the Inflation??”

      I know that originally, inflation was short for “monetary inflation” – but it is also co-opted now to mean “price inflation”. I guess I’m more concerned with price inflation – if the money supply doubles but I can still buy the things I need to live? That’s not a crisis.

      The issue with monetary versus price inflation is that in monetary inflation, you just have to create currency faster than you destroy it. One check mark. For price inflation, you have a complex interplay between three factors – money creation, monetary velocity, and the aggregate price levels of everything in the economy. You might even have monetary deflation but still be seeing inflation.

      • jackaz says

        Thanks for clarifying.

        Since prices for technology have plummeted the last 40 years, have we had 40 years of deflation? But wait, prices for everything we need to live, (food, fuel, housing), have rocketed. So maybe we have inflation? Can we have both at the same time?

        Why not just use the term “rising prices” and “falling prices” rather than mixing up the definition of the word inflation?

        • says

          Ah – but I’m not the arbiter of our lexicon, unfortunately.

          In response to your question? Yes, we can have both at the same time. Consider fuel – usually stripped out of some indicators solely because it is volatile. But in 20 years time we’ve seen between $1.00 and $5.00 gas in the lower 48 (I can’t speak to Alaska!). Not every commodity will move in unison.

          Remember, salt was once a luxury item.

          • jackaz says

            Ok, so by usage, “inflation” has come to mean “rising prices” and “deflation” means “falling prices.” If that’s the case, then “inflation” and “deflation” are no big deal unless they are extreme. And frankly, talking about rising and falling prices is just boring. The question should be WHY are they rising? And for the last 100 years, the answer – often as not – is “monetary inflation”.

            Urgh, I can tell I’m ranting now. Sorry. I should go back to caring about sports.

  7. jackaz says

    Sheesh, I got so wound up I didn’t even answer your question.

    No, I do not think it is reasonable or rational to try to predict inflation 20-30 years out. I think that no matter WHAT your prediction is, you’re gonna be wrong.

    Having said that, I’d love to see the dynamic chart/calculator. It’d save me doing all my own calculations and keep me away from that damn BLS website.

    • says

      Sort of like my predictions on the S&P 500, I agree with you. They don’t have a ton of use for predictive purposes, but they have a huge amount of value for investment decisions. Oh, the market only expects 2.3% inflation? That mortgage is a good idea (for example). Or, better buy TIPS because I expect 4% (for another).

      I have a few more calculators first, but I’m definitely still planning the inflation one. Should be a good one.