In this new short note from FRBSF economist analyses inflation expectations in US.
Predicting the course of inflation is one of the most important challenges facing monetary policymakers. Useful aids to such prediction are the measures of expected future inflation obtained from prices in government bond markets. An examination of recent inflation-indexed and non-indexed U.S. Treasury bond yields suggests that financial market participants believe that the probability of prolonged deflation has become fairly small.
This Economic Letter analyzes inflation expectations and deflation risk by looking at differences in yields between standard Treasury bonds, which are not indexed for inflation, and Treasury inflation-protected securities (TIPS), which are indexed. Stated another way, such an analysis provides a means of measuring differences between nominal and real Treasury yields of the same maturity, which yields important information for measuring inflation expectations. Such an examination suggests market participants believe that the probabilities of deflation at the one- and five-year horizon are currently small. But at the peak of the credit crisis in the fall of 2008, bond investors believed that deflation risks were quite high.
