Expected Inflation

The one-year expected inflation rate jumped to a 27-month high of 3.4% in January, more than a percentage point above last September's 2.2%. The 5-year expected inflation rate edged up 2.9% from 2.8% the prior three months. It has hovered in a tight range between 2.7% and 2.9% for just over a year.

The spread between the 10-year bond yield and the TIPS yield is considered to be a measure of expected inflation. It is up 40bps from 1.96% on October 8 to 2.36% on February 7. It was near zero at the beginning of 2009. The expected inflation rate in the TIPS is a good leading indicator of the actual PCED core inflation rate, which dropped to 0.7% in December, the lowest on record going back to 1960!