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From rising commodity prices absorbed at the core level of the CPI to consumers’ expectation of higher inflation we can now add the market’s expectation regarding inflation.

[Click to enlarge]

TIPs Spreads: The above graph compares the spread between the 10 year Treasury Inflation-Protected Securities (“TIP”) versus the 10 year Treasury bond constant maturity.

As the name would imply, TIPS provide protection against inflation. The principal of a TIPS increases with inflations and decreases with deflation and its yield reflects the expectation with regards to inflation. Therefore, the spread between two riskless government securities—with the exception of an imputed inflation expectation provides is a solid gauge.

The current spread is 2.59% and the highest it’s been since August of 2006 when the nominal 10 year treasury was closer to 5.0% than its current 3.58%. While it’s trendy to hate treasuries, it’s also dangerous to bet against the Fed—unless it’s ready to “fold”.

Disclosure: I am long TBF.

Source: Inflation Continues to Build