Expected Inflation at a Six-Year Low (Unadjusted)

10-year TIPS-derived expected inflation

The charts above show the market-based 10-year TIPS-derived expected inflation from the Cleveland Fed (both unadjusted - top two charts, and adjusted - bottom chart), calcualted from the difference between 10-year nominal treasury notes and 10-year treasury inflation-protected securities. On an unadjusted basis, inflation expectations fell to a six-year low of 1.47% last week, falling below 1.5% for the first time since September of 2002 (see top chart above).

After adjusting for an inflation-risk premium and a liquidity premium (see details here), the Cleveland Fed's adjusted measure (2.45%) shows that expected inflation is the lowest since early November 2007 (see bottom chart above).

As Frederic Mishkin wrote several weeks ago in the WSJ, "Don't worry about inflation." We might have many other economic concerns right now, but I think it's time to take inflation off the list of economic variables to worry about.

Comments

[Paul Killinger:]

Yes, rampant DEFLATION in the value of consumer durables (houses and autos come to mind) will do that for you. But it's a point worth noting. Thank you.

2008 Oct 07 09:16 AM

[carey_jim:]

These numbers aren't meaningful when you consider the steep fall in housing costs (not factored in,) loss of jobs and, most important, the wild fluctuations in the price of oil and energy.

A severe world recession could easily bring deflation and deflation feeds on itself the same way inflation does.

2008 Oct 07 12:30 PM

[granger:]

be careful not to get whipsawed, the printing presses of the world are going to run full steam

while I agree liquidity is a necessity now, just remember the long term flipside

hyperinflation, just my opinion

2008 Oct 11 03:13 AM