Price-rise expectations - A short-term Anomaly?
posted by Realist Theorist @ 12:06 PM
Previously, I described one particular measure of Consumer Price Index (CPI) expectation.That measure implied that five years from now (in Jan 2014) the CPI will be almost the same level as it is today. This expectation is unusual. Historically, people expect CPI to rise. So, I wanted to point out two other details about this anomaly:
It is not expected to last: Zero CPI change over 5 years does not mean zero in every year. When one looks at measures for shorter durations, one finds the following expectation: CPI going down slightly for a couple of years and then coming back up to where it is today. So, the expectation is that the CPI will start to rise again in a few years.
The expectation itself might be reverting to historical patterns: Historically, since 2003, this measure of "expected" CPI was between 1.5% and 2.5% (see points A and B in the graph below) .Then, in 2008, fears of deflation hit and notice how the relationship changed (See the circle marked C.). So, in late 2008, the market went from implying 5-year CPI will rise @2%. to thinking it will drop; now, the market is implying it will go down for fewer years, but will be flat over 5 years.
If the post-December trend continues, we might soon be back to a situation where a rising CPI is expected over 5 years.
I wanted to follow-up my previous post with this one, to make clear that the current situation is anomalous when considered against the last few years. Will it remain that way, or will people soon expect renewed rises in CPI? That's the subject for a separate discussion. Any opinions?
It is not expected to last: Zero CPI change over 5 years does not mean zero in every year. When one looks at measures for shorter durations, one finds the following expectation: CPI going down slightly for a couple of years and then coming back up to where it is today. So, the expectation is that the CPI will start to rise again in a few years.
The expectation itself might be reverting to historical patterns: Historically, since 2003, this measure of "expected" CPI was between 1.5% and 2.5% (see points A and B in the graph below) .Then, in 2008, fears of deflation hit and notice how the relationship changed (See the circle marked C.). So, in late 2008, the market went from implying 5-year CPI will rise @2%. to thinking it will drop; now, the market is implying it will go down for fewer years, but will be flat over 5 years.
If the post-December trend continues, we might soon be back to a situation where a rising CPI is expected over 5 years.
I wanted to follow-up my previous post with this one, to make clear that the current situation is anomalous when considered against the last few years. Will it remain that way, or will people soon expect renewed rises in CPI? That's the subject for a separate discussion. Any opinions?
Labels: INFLATION
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