Could Inflation Be the Surprise of 2016?

I don’t want to overstate this case, but there’s a chance that inflation could be higher-than-expected this year. It’s not that inflation is high by any objective measure. Rather it’s that no one expects much inflation.

The five-year forward inflation expectation is currently below 1.5%. That’s very low. Eighteen months ago, it was 2.5%.

Headline inflation is still quite tame, but there’s been a small increase in core inflation. In fact, seasonally-adjusted core inflation was up by 0.293% last month. That was its biggest month in ten years. That’s enough to erase the Fed’s recent rate hike.

Check out real T-bill yields over the last several years.

It’s interesting to see that real negative yields aren’t that new. They’ve been with us for nearly 15 years (except for a three-year period from 2005 to 2007). The “moderately-more-inflation” argument is hard to make now because the hyper-inflation camp has been so discredited.

Posted by on February 22nd, 2016 at 1:18 pm


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