Saturday, February 02, 2008

Inflation expectations are rising

From the inflation-protected bond market via Grep Ip, here is the the “five-year, five-year forward” breakeven rate. It reflects the market's expectation of five-year inflation beginning five years from now.

A rise in expected inflation is not consistent with the conventional wisdom that the economy is on the verge of a serious slump driven by inadequate aggregate demand. It is, however, consistent with the hypothesis that policymakers are overreacting to some bad economic news with excessive monetary and fiscal stimulus.