Where is inflation headed? Signs

https://www.wsj.com/articles/where-is-inflation-headed-nine-…

**Where Is Inflation Headed? Nine Signs to Watch**
**Economists are especially interested in what current price pressures bode for the longer term**
**By Gwynn Guilford, The Wall Street Journal, May 24, 2022**

**...**
**Short-Term Inflation Momentum - three-month annualized rate.**

**Underlying Inflation - Federal Reserve Bank of Cleveland’s 16% trimmed-mean CPI, which lops off the most extreme price changes, and its median CPI, which shows the middle-most price change.**

**End of the Goods Binge - track the balance of the two broad spending categories (goods and services) in the Commerce Department’s monthly personal-consumption expenditures report.**

**Hot Labor Market - Atlanta Fed’s wage tracker**

**Rent Costs - Zillow’s observed rent index and Apartment List’s rent estimate**

**Autos Are Clutch - Manheim’s used-vehicle value index, which tends to lead the CPI series by a month or two.**

**Oil Futures - Watching the prices on contracts for future deliveries of West Texas Intermediate, the U.S. benchmark for crude oil, offers a rough guide to where gasoline prices may be months or a year from now.**

**Inflation Expectations - median expectation of inflation five to 10 years from now, drawn from the University of Michigan’s monthly survey of consumers.** [end quote]

These are some good indicators. I’ll add them to the Control Panel if I can find them.

The market’s inflation expectation is shown by the 5-Year, 5-Year Forward Inflation Expectation Rate. It’s currently 2.28% and dropping. The bond market seems to have confidence that the Fed will be able to bring inflation back to their target within 5 years.

https://fred.stlouisfed.org/series/T5YIFR

Wendy

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The market’s inflation expectation is shown by the 5-Year, 5-Year Forward Inflation Expectation Rate. It’s currently 2.28% and dropping. The bond market seems to have confidence that the Fed will be able to bring inflation back to their target within 5 years.

Or the bond market has confidence that market forces such demand and supply adjusting and the economy slowing, maybe together with Fed actions, will reduce inflation.

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The bond market seems to have confidence that the Fed will be able to bring inflation back to their target within 5 years.

I may be misunderstanding it, but does it mean that the market expects the fed to get inflation back on target in 5 years, or does it mean average over the 5 year period?

For example, right now, 5-year TIPS are trading at -0.126%, and 5-year treasury notes are trading at 2.758%. Assuming equal credit risk between the two, it looks like at this very moment, the market expects an average inflation rate during the next 5 years to be 2.758+0.126, or 2.884%. That’s pretty close to the fed target of 2% (and many believe that the fed may allow the target to rise to 3% while easing off the brakes over the next few years).

The 10-year on the other hand is 2.767 (treasury bond) and 0.197 (TIPS), so the expectation of average inflation for the next 10 years is 2.767 - 0.197 or 2.57%. So the market thinks that the next 5 years inflation will average 2.884%, but over the next 10 years will average 2.57%, so a 5 year period of about 2.8% or so followed by a second 5 year period of maybe 2.3%, but the market expects over 2% on average for the foreseeable future (even the 30 year and 30 year TIPS show that to be true).

Am I looking at this wrong? Please comment!

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The bond market seems to have confidence that the Fed will be able to bring inflation back to their target within 5 years.

I do not share any of anyone “confidence”. Someone here in the last ten days said equities have things priced in. That is not true either. Priced in is a figment of a hopeful imagination right now if you are long anything.

That includes mi dollars. The appreciation to come is not priced in.

I do see commodity prices dropping bit by bit going forward. That does not mean inflation is going to ease off fast.

The real show is in the Chinese financial system. That Lehman Brothers moment is coming our way.