The chart below can be downloaded here.
The expected rate of inflation implied by the Treasury market (comparing Treasury yields to TIPS) for maturities from 5 to 30 years is clustered—at the tightest spread in over a decade—at just over 2%. This suggests the market sees inflation anchored neatly at the Fed's long-run target well into the future. While we also don't expect rampant and sustained (multi-year) inflation, we find this interesting in light of recent data that shows inflation accelerating. For instance, crude oil is up 54% over the last year, the ISM Manufacturing Prices Paid reading recently hit an 85-month high, the April Atlanta Fed Business Inflation Expectations Index jumped to the highest reading in the survey's history of 2.3%, the percentage of small businesses raising prices jumped to 16% last month—the highest level in a decade according to NFIB—and a host of recent regional Fed surveys and company earnings reports all point to increasing inflation.
If there is anything to be concerned about this late in an economic cycle, we believe it is this apparent faith that the Fed will be able to keep inflation perfectly contained at an ideal level, especially without higher interest rates or wage pressures taking a bite out of economic activity and corporate margins. The BLS will report April inflation on May 10th.
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