Why are 5-year Inflation Expectations declining so much?
Comments are requested for this post. Please give your opinions below…
Looking out 5 years from now, what average inflation rate is the market perceiving? (link to graph)
The market’s perception of inflation over the next 5 years has declined to near 1.5%. Why are 5-year inflation expectations steadily dropping so much?
- Is it oil prices 5 years from now? Will oil prices decline further over the next 5 years? Will China’s demand for oil fall?
- Is it Europe looking to fall into a Japan type deflation?
- Is it central banks keeping interest rates low for an extended period of time? Is it the Fisher Effect causing the real rate to move to its natural rate over time? Is it that if the natural real rate is 2%, and central bank rates stay below 1%, we might eventually see deflation to bring real rates up to their natural level of 2%?
- Is it a view that yields will stay low and that inflation will have to be low so as not to eat into yields?
- Is it uncertainty about a recession that would drive inflation down?
- or is it something else?
first, i’m not sure “inflation expectations” are accurately reflected in the differential between bond prices…there could be a lot of short term trading of the instruments push-pulling the relationship…you could have asked the same question early April and have had it moot by May…
that said, china is slowing and it doesnt look like their govt is going to intervene, japan is going into a third recession, as is Italy & maybe even germany…if the rest of the world turns deflationary we cannot stand alone against the tide..
Japan is going into recession? Seriously, stop posting
oh, on lower oil prices; that’s the Saudis starting a price war…if oil falls much lower, US production will go bust while our consumption rises, setting us up for another oil price spike…
dont count on Chinese consumption falling…their vehicle production hit 22 million last year, compared to our 15…
cummings: http://www.marketwatch.com/story/japanese-data-suggest-recession-may-be-near-2014-10-07
see also Goldman note on the same…
lol on that take. typical media mumbling. what happens when indexes rise?
cummings,
see also from today…
http://blogs.wsj.com/economics/2014/10/09/is-japans-economy-on-the-verge-of-a-recession/
again Ed, the same media mumble. they can’t back it up so they speculate.
How about an underlying societal reason, the defeat of labor? By that I do not mean the rollback of unions or institutions that represent labor but the commoditization of labor so that it is not a human activity but merely another input.
That trend speaks ill for demand since consumption is basically a human activity. Veblen discussed a process that moved from production, human activity for human consumption, towards financialization. Adam Smith spoke of markets in the context of the exchange of goods. Today we think of markets primarily in the sense of the exchange of financial instruments. The cart is driving the horse. Or perhaps the better metaphor is that the garden is yielding bonds, CDOs, swaps, and other financial crops; not the basis of a healthy diet.
Edward,
In your last post was this “The understanding that advanced economies are sick is sinking in.”
I think you are correct there and that has made investors very pessimistic about returns in the future.
Looked at another way, investors don’t see any solution for our current problems.
Investors do not see anything that can be done by businesses or consumers to improve the situation.
And the federal government seems to be in gridlock. It looks as though that will continue. Republicans will not allow Democratic solutions to be put into action. And the Republicans will not win a veto proof majority in the upcoming elections. So their solutions will not be put into action.
And neither political party is willing to force manufacturing back into the US by raising tariffs.
Under these conditions why would anyone be optimistic about the ‘demand for money’ increasing? Who would borrow?
So buy “5-Year Treasury Constant Maturity Securities” and take the safe return.
OR this is an esoteric statistic which assumes that investors are always rational and thus it is meaningless.
Edward:
Kind of in the same ballpark as Mark.
Labor’s share is still down in comparison to Capital.
More Labor capacity than needed which keeps wages down or as some would say too much Labor chasing too few jobs.
With excess Labor capacity there would be no wage driven inflation. Bumping up against demand for goods, there would be less demand as a result of lower wages.
http://www.theguardian.com/business/2014/oct/09/germany-recession-exports-fall
the point is not whether japan and europe are or will go into a recession, but the perception that they will, based on recent data and fed by forecasts repeated in the media….inflation expectations are driven by such perceptions…
Well, the graph shows a big jump in April, which I assume occurred when the March inflation number came out showing a big jump (8% annual rate), after two months with about half as big a rise. Most of the drop since then has just been returning to the previous level, as the last couple of months inflation has been negative (the sudden drop near the end is probably when the August number was released showing a -2% annual rate). So it seemed in the spring that inflation was starting to take off, but then it didn’t.