U.S. Inflationary Expectations Continue To Rise

The accelerating inflation in the United States suggested by the big drop in the dollar against almost all currencies and the big commodity price rally is also evident in inflationary expectations.

When QE2 was first hinted in the beginning of September last year, the yield on the regulary 5-year Treasury security was about 1.4% while the yield on the 5-year inflation-protected Treasury security was about 0.2%, implying expected inflation of 1.2%

Yesterday, the yield on the regular security was 2.31%, while the inflation-protected yield was -0.58%, implying an expected inflation of about 2.9%.

Inflationary expectations has thus risen 170 basis points, or 1.7 percentage points, which is a lot in the Treasury bond market. Noteworthy is that this also represants an the highest ever since inflation protected securities were introduced in 2003 and that the spread even surpasses the highs reached in the first half of 2008, when official inflation had risen above 5%.

Note that the expectations of inflation will help create it, since demand for money will fall, something that has a similar effect on price inflation as an increase in the supply of money.