What’s the outlook for inflation?
The question is simple enough. But the answer is complicated these days. In fact, there’s an array of inflation expectations to pick from in the summer of 2008. If you’re looking to commodity prices as an early warning sign of future pricing trends, the message has been clear: inflation will rise in the months and years ahead.
Skeptical? Perhaps the recent updates on consumer and wholesale price inflation will change your mind. As we noted yesterday, the trend in producer prices has been unmistakably up. Meanwhile, consumer price inflation shows similar symptoms.
Expecting inflation to continue bubbling, in other words, seems like a reasonable proposition. Or so recent history suggests. But such thinking finds no favor in the Treasury market. The prospect of higher inflation is a bond investor’s worst nightmare, but you’d never know it by looking at the CPI-adjusted yield on the nominal 10-year Treasury. Buyers of the 10 year apparently have no fear of buying a fixed-rate bond at a yield that, after adjusting for consumer price inflation for the past year, looks somewhat unappetizing.