The breakeven rate in 10-year TIPS shows that investors expect inflation to rise just over 2% the next decade.
Fed chief Ben Bernanke is “not going to be viewed as the unwitting architect of a ruinous series of price inflation,” said John Lonski, chief economist at Moody’s Capital Markets Research Group, in a Bloomberg report. “I just don’t see that happening, and the TIPS — they don’t see that happening either.”
Low inflation expectations may actually make the Fed more reluctant to begin tapering.
“The Fed minutes are very important, and perhaps some are getting worried that risks are tilted towards a disappointment,” said Kasper Kirkegaard, FX strategist at Danske Bank, in a Reuters report. “Our main scenario is that the Fed will begin tapering in September. If the Fed shows any concerns about low inflation or that they need to see a further improvement in the labor markets before tapering, it could send the dollar lower.”
The chart below shows the relative performance of iShares TIPS ETF (NYSEArca: TIP) against iShares 7-10 Year Treasury ETF (NYSEArca: IEF). The ETFs have similar durations. When the chart is rising, it means inflation expectations are rising.
Full disclosure: Tom Lydon’s clients own TIP.