Inflation Expectations at Record Lows, Despite Global Central Bank Stimulus

July 14, 2016

Inflation Expectations at Record Lows, Despite Global Central Bank Stimulus Photo

Since the end of the credit crisis, central bankers across the globe have been trying their best to stimulate economic growth and avoid the type of deflationary spiral Japan has been battling for over twenty years. Central bankers have almost universally adopted the view expressed by Ben Bernanke in a 2002 speech, “Prevention of deflation remains preferable to having to cure it.” Deflation increases the real debt burden for borrowers and with it the likelihood of widespread defaults in over-leveraged economies.

The Federal Reserve’s favorite measure of longer-term inflation expectations is the 5-year, 5-year forward inflation rate. This rate measures the market’s expectation for inflation beginning five years from today and ending in ten years (i.e. the expected inflation rate from 2021-2026). Despite unprecedented measures by the Federal Reserve to boost prices and reach its 2% inflation target, longer-term inflation expectations in the U.S. have now reached their lowest level in nearly twenty years (approximately 1.3%). Today’s chart measures the history of the 5-year, 5-year forward inflation rate since 1999. U.S. Treasury Inflation Protected securities (TIPs) were first issued in 1997.

Key Takeaway:

Despite moderate growth in the United States and some signs inflation pressures may be building over the near-term, fixed income markets today are suggesting deflation may still be a bigger risk for the economy and investors longer-term. Tracking one of the many key economic indicators the Federal Reserve officials are watching provides investors a valuable tool when assessing the probability and timing around the next potential change in monetary policy.

Tags: Chart of the Week | Inflation | Deflation | Ben Bernanke | Central banks | Long-term

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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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