Some information from the market and estimated inflation rate.
First, from the direct 5-year break-even point obtained using U.S. Treasury bonds and TIPS, the expected average inflation rate for the next 5 years:
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 %. Source: FRB through FRED, Ministry of Finance, King, Walsh, and Wei (2019) After D’amico, Kim and Wei (DKW) interviewed 11/5, NBER and the author’s calculations.
Please note that in ten days, the break-even point has dropped by 12 basis points, and it has not fully returned to the level of the soaring yield.On the other hand, the premium (inflation risk, liquidity) adjustment sequence is based on D’Amico, Kim and Wei (2018) (Hereinafter referred to as DKW) has hardly wavered in the 5-year break-even soaring.
The five-year forward inflation expectations inferred from market interest rates jumped 27 basis points from 9/23 to 10/15, and then fell back to the previous level at the end of October (and then rose again). The adjusted series means that there is only a slight increase-6 basis points before returning to the 9/23 level at the end of the month.
figure 2: Five-year five-year forward expected inflation calculated from the yields of Treasury bonds and TIPS (blue), and five-year forward expected inflation calculated using the spread adjusted by the inflation risk premium and the liquidity premium per DKW (red) , All in %. Source: FRB through FRED, Ministry of Finance, King, Walsh, and Wei (2019) After D’amico, Kim and Wei (DKW) interviewed 11/5, NBER and the author’s calculations.
The adjusted series shows that inflation expectations are more anchored than using simple break-even ratio calculations. Kim, Walsh, and Wei compared their implied expected inflation rate with the inflation rate provided by other researchers in this study. Federal Reserve BillsAlthough the KWW updated series is only an estimate, it is interesting that by 2019, all estimated inflation series have converged.
