Inflation expectations fall despite rising oil prices

The cleanest measure of long-term inflation, the expected 5-year inflation rate 5 years forward, fell noticeably during the past week, despite a continued surge in oil prices. That’s unusual, because the expected inflation rate priced into inflation-indexed securities usually tracks the oil price.

During most of 2020, long-term inflation expectations rose despite falling oil prices (the market clearly thought the price drop was temporary). But now we have seen a fall in inflation expectations while oil prices are rising.

We call attention to this anomaly in order to beat our favorite dead horse, namely the widespread idea that a return of inflation will force the Federal Reserve to raise interest rates (or at least “taper” its enormous purchases of US Treasury securities), provoking a sharp reduction in stock market valuations.

As we showed in yesterday’s Chart of the Day, falling rents in the wake of the Covid-19 pandemic stem from high and persistent unemployment, and that’s the biggest item in family budgets. Medium-term inflation-protected bond yields have been falling for the past week, and stock prices have been recovering.

US tech stocks have come off the bottom, and Chinese tech stocks have bounced – less because of reduced worries about the Fed in the case of Chinese tech, and more because of de-escalation of the US-China tech war. The yield on the 5-year Treasury Inflation Protected Security is down to negative 1.81%, about 20 basis points below the February 25 peak at the worst of the Fed scare.