Higher threat of deflation leads to more chance of inflation

Coincident with the sharp drop in bond yields and commodity prices over the past few weeks, the implied inflation rate over the next 10 years as measured by the TIPS has fallen to 1.95%, the lowest since Oct ’09 and is down 25 bps just over the past 3 days. This action obviously feeds the disinflation/deflation argument but the inflation side of the debate is predicated on the belief that this short term behavior leads to more money printing and cheap money for longer to combat it. This encapsulates the inflation camp, the continued threat of deflation for now leading to the ever increasing fight on the part of central banks to combat it.

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