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From TIPS Charts; Inflation On The Horizon...

One of the big stories this year—and one of the least reported—has been the disappearance of deflation risk. That is highlighted in the first chart here, in the area circled, which shows how the market's expectation of future inflation has risen. (Inflation expectations are calculated by subtracting the real yield on TIPS from the nominal yield on Treasuries of similar maturity.)

At the end of last year the bond market was expecting to see roughly five years of deflation, followed by 5 years of modest inflation, adding up to almost a zero net change in the price level over the subsequent 10 years. Just five months later, the bond market now expects inflation to average about 1.1% a year for the next 5 years, and 1.7% a year for the next 10 years. While this marks a pretty dramatic shift in expectations, the inflation discounted by bond prices today is still lower than it has been for the past 5 years, and lower than the inflation registered in any 10-year period since 1965.

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