A recent Bloomberg Businessweek magazine cover asking “Is Inflation Dead?” is drawing comparisons to other contrarian indicators, most notably the 1979 BusinessWeek cover titled “The Death of Equities.” Inflation in the United States has remained stubbornly below the Federal Reserve’s (Fed) 2% target since the mid-1990s. To date, secular disinflationary forces such as technological advances (e.g., “The Amazoning of America”), globalization and an aging demographic continue to overwhelm typical late-cycle pressures for higher inflation. As more countries focus inward economically and politically, globalization is the only trend likely to reverse course and possibly tip the scales toward higher inflation.
This week’s chart examines inflation in the United States through a different lens — the long-term moderation in the volatility of inflation. The chart highlights inflation volatility using the overall Consumer Price Index (CPI), Core CPI (excluding food and energy) and 10-year implied break-even inflation (Treasury Inflation-Protected Securities first issued in 1998 providing a shorter history). In all three measurements, inflation volatility is near the low.
In a world with mounting economic and political uncertainty, trends towards lower inflation volatility are viewed favorably by both investors and economists. Low and stable inflation creates “a better world for households and businesses, which no longer experience or even fear the scourge of high and volatile inflation.”
Despite the favorable trends depicted in this week’s chart, the Fed’s own research found the long-term moderation in CPI volatility was driven by methodological changes as opposed to an actual decline in inflation volatility. Revisions to seasonal adjustment factors and shelter costs, now using owner’s equivalent rent instead of actual home purchases costs, were the largest contributors to the moderation in inflation volatility.
Whether driven by secular trends or methodology changes to the measurement of CPI, markets continue to discount the risks of higher inflation and inflation volatility. With central bankers across the globe continuing to focus on the risks of deflation and more countries prepared to ramp up fiscal stimulus in response to slower growth, Treasury Inflation-Protected Securities (TIPS) offer fixed income investors inexpensive insurance against excessive money printing in its various forms, eventually pressuring inflation.
The material provided here 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 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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