Is the inflation panic bubble over?
As of yesterday, the five-year inflation break-even point was 2.5%, which was lower than the 2.72% in mid-May. As of July 30, the adjusted 5-year breakeven estimated inflation risk and liquidity premium was 1.62% (the corresponding actual breakeven at the time was 2.56%).
figure 1: The five-year inflation break-even point is calculated as the five-year treasury bond yield minus the five-year TIPS yield (blue). The five-year break-even point is adjusted based on the inflation risk premium and the liquidity premium per DKW (red). All are in %. NBER defines recession dates as shades of gray (from the beginning of the peak month to the end of the trough month). Source: FRB through FRED, Ministry of Finance, Kunshan After D’amico, Kim and Wei (DKW) interviewed 8/5, NBER and the author’s calculations.
figure 2: The ten-year inflation breakeven is calculated as the ten-year treasury bond yield minus the ten-year TIPS yield (blue). The ten-year breakeven is adjusted by the inflation risk premium and the liquidity premium per DKW (red), both in% . NBER defines recession dates as shades of gray (from the beginning of the peak month to the end of the trough month). Source: FRB through FRED, Ministry of Finance, Kunshan After D’amico, Kim and Wei (DKW) interviewed 8/5, NBER and the author’s calculations.
As Gannion and Sarsenbayev It was pointed out earlier this year that market-based inflation expectations are not particularly good at predicting actual inflation.I agree, as in This post, But I think that measures to eliminate extreme events related to liquidity premiums may be slightly better in terms of forecasting.
Having said that, mid-term inflation expect The position of the Phillips curve is very important, as described in this article postal.
Even if the market has rational expectations (in equilibrium-sometimes called FIRE), this only means that it is correct on average. Indeed, the interest of the “Internet” has diminished.
image 3: The five-year inflation balance is calculated as the five-year treasury bond yield minus the five-year TIPS yield (blue). The five-year balance of payments is adjusted by inflation risk premium and liquidity premium per DKW (red), all For %, and Google Trends search “inflation” index us. NBER defines recession dates as shades of gray (from the beginning of the peak month to the end of the trough month). The daily Ministry of Finance data is on average weekly. Source: FRB through FRED, Ministry of Finance, Kunshan After D’amico, Kim and Wei (DKW) interviewed 8/5, NBER and the author’s calculations.
Finally, I think that concerns about aggregate demand shifting to a high speed (separate from aggregate demand that far exceeds potential GDP) are waning. Both the 5-year and 10-year TIPS yields are close to historical lows.
Figure 4: The five-year TIPS yield (dark blue) and the five-year TIPS yield (light red) are both expressed in %. NBER defines recession dates as shades of gray (from the beginning of the peak month to the end of the trough month). Source: FRB calculated by FRED, Ministry of Finance, NBER and the author.
To be sure, these calculations do not take into account the liquidity premium of TIPS. The five-year average short-term interest rate is expected to deviate from the recent low, but still below zero, at -0.45% (compared to -1.87% for 7/30).
