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Inflation? What inflation?

What are the inflation expectations of people who move serious amounts of money, The Fed today reported the yields of inflation-indexed bonds. The trend in the 30 year bond [due 2029] is similar, but at a current yield of 0%. And the 10-year bond below? – negative!! No sign of inflation expectations.

Furthermore, the Atlanta Fed blog has a nice post on the output gap. We looked at several methods of measuring potential GDP (in our notation, Y*) by looking at:

  1. projections (Hodrik-Prescott filters)
  2. Phillips curve approaches (using either U or π)
  3. modeling approaches (production functions, full macro (DSGE) models

But there are other approaches, too, specifically direct measurement of capacity utilization. The Fed reports a survey-based approach. The bad news first: they find even more excess capacity than the other approaches they use. The good news: the excess is shrinking.


  1. Yes, the article checks off various indicators, including our Phillips curve indicator (unemployment), expectations measures (TIPS and consumer surveys), specific prices (commodities, exchange rates, wages) and sectoral indicators (container ships, service sector costs). It then argues that none of the 8 have turned up – whoever wrote the headline was trying to catch the attention of potential readers, “8 Early Warning Signs…” without noting that none of the 8 signs were in the yellow zone, much less the red zone. In the background is an effort to get people to think of JPMorgan Asset Mgt as a “go-to” place that’s trying to watch out for things that might hurt their wealth. So I’m sure the author (Michael Hood) doesn’t mind a little bit of misdirection. But again, the bottom line is that none of his signs point to inflation, and most are not moving.

    After all, as we’ve noted in class, wages are the biggest single component of costs, and if wages — or more precisely, employment costs — aren’t rising [more precisely, rising faster than productivity] then inflation can’t occur. One of Hood’s narrower indicators is service sector costs, where wage pressures would show up first because productivity growth tends to be lower and wages tend to be a higher share of total costs. No yellow flags. As he points out, with headline unemployment still above 8%, it’s hard to tell a story of tight labor markets. Indeed, he goes out of his way to note that commodity prices aren’t in and of themselves substantive, because they are a small component of costs. Ditto his other indicators. A change hints at a shift in the dynamics of one or another part of the global economy, even though none of them are direct components. If so, then look at the other indicators more carefully. But for right now, don’t worry about inflation, worry about jobs.

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