INFLATION? WHAT INFLATION?

Mish at Global Economic Analysis has an excellent post this afternoon regarding inflation (or the lack thereof).  He refutes the notion that the Fed is succeeding in its attempts to create inflation.  I agree of course.  The Fed has only created some higher level of expected inflation.  But we’ve seen this movie before.  Inflation expectations will rise briefly before the economic reality hits the market in the face and expectations come back to earth.  Let’s remember, inflation will be accompanied by economic recovery so if you’re betting on higher than average inflation (the historical average is 3.5%-4% depending on your timeframe) you better also be betting on equities.  If our new economic growth strategy is dependent on the fact that Ben Bernanke can talk up a $15T economy then Lord help us all.

What Mish eloquently shows is that, in the long-term, inflation expectations have utterly collapsed as economic malaise  has cast a cloud over the US economy over the last decade:

Sure, the TIPS spread might have jumped 50 bps in the recent weeks as Bernanke jawbones, but the spread remains narrow by historical standards and continues to forecast very low future inflation:

If we take a longer look at the inflation picture the story is much the same.  At just 1.1% year over year CPI remains well below its historical average:

The market is in a tizzy over the Fed’s new efforts to boost the economy via quantitative easing and its supposedly inflationary impact, however, talk is cheap.  Despite the markets new found faith in Ben Bernanke the likelihood is that very low economic output will continue to result in below average levels of inflation with a higher threat of deflation than hyperinflation.