10 year breakeven inflation rate @ 2.64%

[corn18]

Highest it's been since Aug 2006. Not sure what it means other than the bond market is not convinced of the transitory hope for inflation.

 

[GravitySucks]

?

10 year treasury has a 1.696% today.

 

[corn18]

The 10 year breakeven rate serves as an indication of the markets' inflation expectations over the 10 year horizon. ... The spread or gap between 10 year Treasuries and TIPS will be lower if fixed income traders' inflation expectations are lower.

 

[GravitySucks]

The 10 year breakeven rate serves as an indication of the markets' inflation expectations over the 10 year horizon. ... The spread or gap between 10 year Treasuries and TIPS will be lower if fixed income traders' inflation expectations are lower.

Thank you

 

[Montecfo]

Even so, 2.64 pct is not much inflation.

I think my interpretation would be that dispite current price spikes, the long-term inflation rate is currently only expected to be 2.64 percent, and that is up only modestly from recent history.

 

[OldShooter]

Even so, 2.64 pct is not much inflation. ...

In the eye of the beholder, I guess. 2.64%/10 years, dollars have lost about 1/4 of their buying power/prices are up 30% in dollar terms. So I think it's "much" but certainly the central bankers do not.

 

[Montecfo]

In the eye of the beholder, I guess. 2.64%/10 years, dollars have lost about 1/4 of their buying power/prices are up 30% in dollar terms. So I think it's "much" but certainly the central bankers do not.

Objectively and historically it is not much inflation. Inflation has averaged closer to 4 percent during my lifetime. So it is sharply below average.

 

[USGrant1962]

Very long term US inflation averaged about 2.25% https://www.multpl.com/inflation
Since the end of WWII about 3.6% (including the 1970s)
Since 1984 about 2.6% (my full time work lifetime)

Take your pick, but IMO 2.6% is fairly average and enough to hurt over time.

 

[OldShooter]

IIRC the long term US average is 4.11%, but that doesn't make me happy to see inflation rise over what we've seen lately.

 

[SecondAttempt]

There are a lot of economists that argue that inflation around 2-3% is far better than zero or negative inflation. That range provides a cushion against a deflationary spiral which would be bad for almost everyone.

I don't see why 2.64% is scary. If we assume that 10 year US Treasuries return about 2% long term and stocks return 6% over 10 year US Treasuries, then it only takes about 10% exposure to stocks to achieve a 2.64% return to keep up with inflation.

I have no idea what the long term return of 10 year US Treasuries will be but the 6% equity risk premium has held up for a very long time so I personally think we can rely on that.

I am sanguine about how to think abou this. My entire working life inflation has been significantly higher than 2.64% so that figure seems good. But I have been working and getting regular salary increases that masked inflation from me. I realize it will be different when I retire.

On top of that, there are so many crazy things going on right now that I don't actually believe any data since about January 2020 should be used to make any projections. I personally think we have a few years of disruption ahead of us so I would not be surprised to see 4-ish % inflation for 3-4 more years. But I would not be worried about that.

My "prediction" is based on a general rule for complex systems that when there is a period of disruption it takes the system 2-3 of the same time period to stabilize again. With covid and associated market disruptions we had about 1.25 years of disruption so stabiliztaion should not be expected for 2.5 to 3.75 years from July 1, 2021 meaning end of 2023 to early 2025. It's just a S.W.A.G. but I am not going to get too worried about any inflation numbers before that time frame. The 4% inflation estimate over that period is nothing more than taking the 6% we've seen recently and the 2% I expect things to stabilize to (as it was prepandemic) and averaging. I will almost certainly be wrong about exact details but I'm a numbers guy and need some baseline from which to make decisions.

Edit: typos

 

[youbet]

SecondAttempt,

Be careful using averages here. Sequence is critical.

 

[SecondAttempt]

SecondAttempt,

Be careful using averages here. Sequence is critical.

Yes, of course sequence is important. But less so over 2-4 years than longer term.

More qualitatively I have been noting similarities recently between the 1920s and the 2020s. Both started with a pandemic, end of a war, political strife, and the 1920s (the Roaring 20s) were a period of technological innovation (movies, radio, cars, and airplanes) and a general sense of disruption.

They even had the "Lost Generation" much like we have the millenials who are disillusioned right now.

Of course the 20s ended with the stock market crash and the great depression so not necessarily a good thing. But I'm actually pretty optimistic about the post covid world.

 

[Closet_Gamer]

Even so, 2.64 pct is not much inflation.

I think my interpretation would be that dispite current price spikes, the long-term inflation rate is currently only expected to be 2.64 percent, and that is up only modestly from recent history.

2.6% isn't really high by historic terms...but 2.6% in the face of current yields is quite difficult. It means there is no place to go for guaranteed returns that even keep up with inflation. It will just feed the demand side of the equity beast.

In principle that should bid down bonds and normalize yields...but until the central banks take their foot off of the gas we're all likely taking real losses on our fixed income.

There is such a loaded spring building behind interest rate normalization.

 

[corn18]

Real returns on bonds go up and they go down. I can probably find any trend my heart desires in the data. I buy bonds because the blue line has smaller excursions than the orange one. Pretty simple, really.

 

[GenXguy]

I think these estimates are low even for the very low government figures, which we know are considerably lower than true inflation. I'm seeing inflation for 10% or greater on most things. And no, don't expect inflation to drop to a reasonable level any time soon, and even when inflation drops, that does NOT mean prices will drop. It just means those inflated prices might not keep going up from their already inflated prices as quickly, but they may continue to skyrocket for some years to comes with all the money flooding the market, rising wages, and manufacturing and supply chain backlogs.

 

[Sniggle]

I'm seeing inflation for 10% or greater on most things.

I concur. I think inflation is 10%+, and will be for a few years before becoming more tame, but at elevated price levels.

It kinda puts in prospective the 15% returns...which are actually less than 5 points ahead of the wave of inflation.

 

[Montecfo]

I concur. I think inflation is 10%+, and will be for a few years before becoming more tame, but at elevated price levels.

It kinda puts in prospective the 15% returns...which are actually less than 5 points ahead of the wave of inflation.

Respectfully, inflation is not 10 pct. If you believe it is, curious how you are investing to mitigate this?

 

[Montecfo]

There are a lot of economists that argue that inflation around 2-3% is far better than zero or negative inflation. That range provides a cushion against a deflationary spiral which would be bad for almost everyone.

I don't see why 2.64% is scary. If we assume that 10 year US Treasuries return about 2% long term and stocks return 6% over 10 year US Treasuries, then it only takes about 10% exposure to stocks to achieve a 2.64% return to keep up with inflation.

I have no idea what the long term return of 10 year US Treasuries will be but the 6% equity risk premium has held up for a very long time so I personally think we can rely on that.

I am sanguine about how to think abou this. My entire working life inflation has been significantly higher than 2.64% so that figure seems good. But I have been working and getting regular salary increases that masked inflation from me. I realize it will be different when I retire.

On top of that, there are so many crazy things going on right now that I don't actually believe any data since about January 2020 should be used to make any projections. I personally think we have a few years of disruption ahead of us so I would not be surprised to see 4-ish % inflation for 3-4 more years. But I would not be worried about that.

My "prediction" is based on a general rule for complex systems that when there is a period of disruption it takes the system 2-3 of the same time period to stabilize again. With covid and associated market disruptions we had about 1.25 years of disruption so stabiliztaion should not be expected for 2.5 to 3.75 years from July 1, 2021 meaning end of 2023 to early 2025. It's just a S.W.A.G. but I am not going to get too worried about any inflation numbers before that time frame. The 4% inflation estimate over that period is nothing more than taking the 6% we've seen recently and the 2% I expect things to stabilize to (as it was prepandemic) and averaging. I will almost certainly be wrong about exact details but I'm a numbers guy and need some baseline from which to make decisions.

Edit: typos

Very interesting analysis, SecondAttempt. That all seems quite rational.

I think part of the good news here is that the market is comfortable that the Fed actions are sufficient to keep inflation in check for the long term. So current Fed path is probably good, sayeth the market.

This is good news for investors.

 

[MichaelB]

I think part of the good news here is that the market is comfortable that the Fed actions are sufficient to keep inflation in check for the long term. So current Fed path is probably good, sayeth the market.

This is good news for investors.

I agree with Montecfo

Just to remind everyone, this is expected inflation of 2.64%. It’s not a Fed projection nor is it current inflation. It is what professional bond investors expect over the next 10 years, and is measured by the difference between 10 year nominal and inflation protected Treasuries.

 

[OldShooter]

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.

I don't lose a lot of sleep over the weather because I can't do anything about it and long-term forecasts are essentially useless. Same-o worrying about what the economy or inflation will do.

The chapter "How to Drown in Three Feet of Water" in Nate Silver's "the signal and the noise" is a worthwhile read on the subject of economic forecasting.

 

[yhoomajor]

Inflation is increase in cost (what other people are willing to pay for resources) of tangible things & services we need to live. It is NOT a number that Government publishes or Fed projects or any one of us calculates.

Next time you, or your kids are buying a house.. argue with seller that - hey Government told me inflation is only 2.x%, can they sell the house for just 2.x% over last year's price. And see how fast they laugh you or your kids out of that place.

And its same with most other living expenses. Whether its Car, College expenses, Health expenses, Labor cost, your local plumber or electrician etc.

One can make some argument that hey over long period - 10yr, 20 yr.. average is 2% or so (or whatever that number is), but that is if you use "replacement stuff" to account for "things" we need to live. Offshoring to china maintained the prices of plastic goods (computer, TV, toys etc).. but that party is ending in front of our eyes right now. We will have to find another sucker country to manufacture and sell us stuff for freshly printed paper (oops I mean dollars).

 

[teejayevans]

Respectfully, inflation is not 10 pct. If you believe it is, curious how you are investing to mitigate this?

Gas prices, real estate, and food are well above 10%, when compared to over a year ago.
Of course the core inflation number quoted doesn’t include those.

 

[Magus]

Respectfully, inflation is not 10 pct. If you believe it is, curious how you are investing to mitigate this?

If you adjust CPI for where rent prices have actually increased to rather than the owner's equivalent rent - which is dumb since 99% of owners have no idea what their house would rent for - CPI would be close to 10%. It's over 1/3 of the index and right now is using ~2.5% increase in rents - when in reality rents are up ~15% y/y currently (housing prices same).

 

[MichealKnight]

2.64....blessing?

With all the money printing.

With all the money being passed out for this credit for that....

Isn't 2.6% a blessing?

I'm a bit surprised if it's that low

 

[Montecfo]

If you adjust CPI for where rent prices have actually increased to rather than the owner's equivalent rent - which is dumb since 99% of owners have no idea what their house would rent for - CPI would be close to 10%. It's over 1/3 of the index and right now is using ~2.5% increase in rents - when in reality rents are up ~15% y/y currently (housing prices same).

I think the owners equivalent rent is actually one fourth of CPI. "Actual" rents would have to be rising by 25 percent annually to get to 10 percent overall inflation.

No matter how you slice it I don't think that is true or close to true nationally.

And of course even if that were true it can't continue at that rate very long due to affordability.