“Right now, there’s no real inflation at play. But if we go further than we are currently, inflation is inevitably going to rise.” That’s from Alan Greenspan on CNBC this week. The “further” relates to US Federal deficit spending, the idea being that +$1 trillion annual budget shortfalls will eventually trigger price inflation.
It isn’t just Greenspan that is worried about rising US consumer price inflation; as we read through the most bearish market commentaries for 2020 this concern often has pride of place. Easy monetary and fiscal policy combined with a reaccelerating US/global economy late in a cycle is THE playbook for rising prices, so fair enough. The counterarguments are more structural (aging demographics, Internet price discovery, etc.), and while those work over the long term we can’t lean on them too hard in any given year. So do the inflation hawks have a case to make about 2020?
You know our methods for evaluating questions like this – a combination of market-based expectations and historical/real time data – so let’s get right to it:
#1: Expected 10-year inflation expectations imbedded in Treasury Inflation Protected bonds (TIPS spreads):
- Even during the period of Federal Reserve bond buying, TIPS spreads were reasonable proxies for market expectations about long-run future inflation. The lowest they ever got was 1.2% in early 2016 and they have often been +2.0% over the last decade, the Fed’s notional target (see chart below).
- TIPS spreads were +2.0% for almost all of 2018, for example, only dropping in November along with US/global growth expectations.
- Expected 10-year forward inflation as measured by the TIPS market hasn’t touched 2.0% in 2019 and currently sits at 1.73%.
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