Inflation/Deflation/Disinflation

Coincident with the drop in China, commodity prices, Baltic Dry Index and the rally in US Treasuries, the implied inflation rate in the 10 yr TIPS today is falling to 1.88% from 1.91% Monday and 2% one week ago. It now is matching the lowest level since Oct ’09. Inflation expectations 5 yrs out at 1.61% is lower too but still above the recent low of 1.56%, also the lowest since Oct ’09. The inflation/deflation debate obviously gets more fuel for discussion today but at 1.5-2%, future inflation expectations are still well above zero, therefore disinflation is the more current scenario. Either way, as I’ve been saying, the discussion misses the point in that the greater the short term disinflationary trends there are, the easier for longer the Fed will be with another round of QE in the future always a lever that the Fed will no doubt use if needed. Thus, we can have both deflation/disinflation and inflation with one coming after the other.

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