An Evaluation of the Threat of Near-Term Inflation
Northern Trust
Asha Bangalore
June 15, 2010
There is a great deal of market chatter about the timing of the next monetary policy move. Among the many indicators of building inflationary pressures in the economy, inflation expectations rank high on the watch list. Inflation expectations as of June 11 (195 basis points) have moved down from a high of 245 basis points at market close on April 29 (see chart 1).
For the money bugs, money supply is barely growing. Therefore, it is more likely that a threat of inflation is remote given the weakness of money growth.
For the hawks in the FOMC, the fear of inflation induced by the ballooning of the Fed's balance sheet has not translated into rising inflation expectations (see chart 3 and chart 1). Moreover, until the trillion plus excess reserves is reduced to an insignificant number, the threat of inflation remains a non-issue.
From the demand side of the economy, final sales grew only 1.4% in the first quarter. The gains in final sales in the fits four quarters of the recovery have held between 0.7% and 1.7%. This is hardly the stuff of inflation in the near term. The evidence presented here weakens the case of the hawks, for now. In other words, there is plenty of room for the economy to grow before the Fed slams the monetary policy brakes.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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