Bond Yields Plunge, Inflation Fears? Really? Where are They?

Amusing Look at Inflation Fears

• May 18 NYT: Inflation Fears Abound as Gas and Lumber Shortages Bite
• June 14 CNBC: Americans’ inflation fears reach a fever pitch as consumer prices rise
• June 17 Reuters: Economists eye surging money supply as inflation fears mount
• June 17 WSJ: Red-Hot U.S. Economy Drives Global Inflation, Forcing Foreign Banks to Act
• July 5 Bloomberg: Oil Price Spike Risks Wider Market Swings Amid Inflation Fears

Consumer Expectations

On June 16, in Consumer Inflation Expectations Jump 7th Straight Month to a New Record High I commented “Inflation Expectations Are Meaningless.”

That of course is heresy to the wizards at the Fed (and ironically most Fed detractors who believe the Fed only when it suits their purpose). 

For now anyway, inflation proponents cite expectations and fear of those expectations. 

Inflation Expectations

Inflation Expectations vs Year-Over-Year Inflation Measures Detail 

After drifting sideways near the 3% mark, consumers started penciling in higher inflation expectations in March of 2021 and higher point predictions in December of 2020. 

One has to wonder how much of this is real opinion vs constant news recently of higher prices. 

Inflation Expectations Are Meaningless 

Contrary to widespread belief that inflation expectations matter, they are actually meaningless as the above charts show.

For most of eight years reported inflation was under 2% and often under 1%, and briefly negative. Yet, the look ahead median point prediction was never below 2.9%.

If expectations mattered, why did the CPI and PCE stay below 2% so long? Why are bond yields behaving as they now do?

It’s Transitory 

For months now, a few of us wayward souls have agreed with the Fed that price inflation (as measured by the CPI) is indeed transitory.

I commented on that many times, while also noting the Fed Has a Vested Interest to Lie. 

The Fed’s track record suggests there is a very strong reason to believe it is wrong again except for one thing: The boat is overloaded in near universal belief the Fed is indeed wrong again.

On May 7, I commented Add David Rosenberg to List of Those Who Believe Inflation is Transitory

Recall Bob Farrell’s classic market rule: “When all the experts and forecasts agree, something else is going to happen.”

Who Else Is in the Transitory Camp?

There are not many of us, but Lacy Hunt at Hoisington Management is in the small group.

On April 9, I commented Expect Inflation to Accelerate? Here’s 8 Reasons to Expect Decelerating Inflation

In that post I quoted Lacy Hunt at Hoisington Management.

Right for the Wrong Reason

I believed then and still do now, that the Fed is right for the wrong reason. 

Inflation is transitory because the Fed itself blew another amazing set of bubbles. When bubbles pop, the result iks anything but inflationary. 

Is My Mind Firmly Set?

A Reader Asks “What Would it Take for Me to Change my Mind on Inflation?“

I mentioned two things, neither of which I expect, at least anytime in the near future.

Meanwhile take a gander at bond yields, especially the long bond yield which took another dive below the 2% mark today.

What fear of inflation do you see?  

There may be fears, fueled by mainstream media, as well as the housing market but not in the CPI. 

For discussion please see Home Price Growth Hits a New 30-Year Record, What? No Inflation?

This of course goes back to my comment “as measured by the CPI“. 

Asset prices are booming, and contrary to the Fed’s opinion, it blew another set of bubbles. One might label that inflation, or the result of inflation, but the bond market now senses what’s next.

Subscribe!

Like these reports? I hope so, and if you do, please Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

If you have subscribed and do not get email alerts, please check your spam folder.

Mish