With the persistent weakness in the US$, a 4% rally this week in the CRB index, much better than expected job’s data from Australia and Canada, a rate hike from the RBA, and a weak 30 yr US bond auction, inflation expectations in the 5 year TIPS has risen 11 bps on the week to 1.5%, a 3 1/2 week high after a 5 bps move up today. Inflation expectations in the 10 yr TIPS is up by 7 bps today and 15 bps on the week to 1.85%, the most also in 3 1/2 weeks. Based on past commentary, the Fed has been more inclined to look at these market expectations in gauging inflation sentiment rather than other market indicators such as gold and thus the US$. The TIPS are still far from a level that would worry the Fed and they will certainly be more reactive than proactive in dealing with it if it rises much further.
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