The gold bugs should be happy, but they’re not. Yet inflation expectations are falling, and it’s no short-term trend. The Cleveland Fed reports that expecting less on the inflation front has been intact for three decades. Matthew Yglesias suggests ours is an “era of ever-falling inflation expectations.”
Is this a random event? Yglesias has his doubts:
Certainly it’s striking that during the past thirty years of FOMC statements and speeches by chairmen and Fed governors, not a single sentence starts with the clause “as part of our thirty year drive for ever-lower inflation expectations…” even though it’s hard to believe that inflation expectations have been steadily falling for thirty years by accident. Is there some actual reason to be doing this? I feel like if there were, the people doing it wouldn’t be so hesitant to admit that it’s what they’re doing.
Accidental or not, the market’s outlook for inflation continues to fall. As of yesterday, the implied inflation forecast via the interest rate spread between the 10-year nominal and inflation-indexed Treasuries is 1.91%.
That’s not so bad if it remains at 1.91%, although the market has its doubts that stability is destiny. James Bullard, St. Louis Fed president, isn’t so sure either, albeit a doubt expressed in central bank-speak. “The behavior of inflation over the last year supports the idea that the fundamental output gap has been smaller than recognized, and that asset purchases are a potent tool for influencing inflation and inflation expectations,” he says.
Context is important, of course. Are we in a growth environment? Or do risks to economic expansion lurk? Even a casual review of the evidence leaves no doubt about the answer. That leads Adam Posen, an American economist at the Bank of England, to warn that inflation fear these days is “exaggerated.”
The market seems to agree. Policy makers here and abroad are another matter, albeit with the occasional exception.