Just a couple of weeks ago, Bloomberg reported that Federal Reserve Chairman Jerome Powell sold investors on the idea that rising inflation wasn’t going to last. Officially, as of May 2021, inflation had risen 5%, the highest since August 2008.
Here’s how we know investors bought it: while the CPI is running at 5%, the yield on the 10-year Treasury languishes around 1.5%. For comparison, back in 2008, the 10-year Treasury yield stayed above 3.5% from January through November (and even broke 4% on a few occasions).
Bond buyers do not want interest rates to rise. A 10-year bond yielding 1.5% looks pretty pitiful if interest rates rise to, say, 3.5% (like back in 2008). So clearly bond investors aren’t expecting interest rates to rise in response to this little blip of inflation.
Maybe you remember the specific term Powell used to describe a temporary period of excessive inflation?
“Transitory.”
Whew, that’s a relief! At least we won’t have to tolerate this way-over-target inflation situation forever.
Today’s inflation: how high is too high?
We know that real-world inflation is somewhere between 9-12%, depending on which Federal Reserve methodology is used to calculate it. Either way, it’s quite high.
That’s right, we can get a closer look at the realities of inflation using methods developed and employed by the Federal Reserve itself.
In the 1980s, the Fed was aware that Americans spent money to maintain their standard of living (in other words, your level of income, comforts and services like healthcare you purchase). Official inflation calculations took this into account.
Using the 1980s formula, you can see how today’s Fed “official inflation” stacks up on the chart below:
If you thought 5% inflation was bad, 13% is much worse.
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