If you want to know what’s going to happen to inflation in the months or even years ahead, don’t listen to the pundits.
Don’t listen to your obnoxious, opinionated relatives on “social” media.
Don’t look at the gold price, or the bitcoin price.
You don’t even have to listen to economists, who as a general rule think they know vastly more than they actually do.
If you want to know where inflation is currently headed, all you have to do is look at two numbers that are freely available to anyone on the internet.
The first is the interest rate on regular U.S. Treasury bonds.
The second is the interest rate on inflation-adjusted U.S. Treasury bonds, known as “TIPS.”
These two numbers are generated by the profit-seeking activities of millions of investors and traders in the bond markets, and are the best available indicator of the future of consumer price inflation.
And the good news is that, right now, they are telling us there is nothing to worry about.
For example, the interest rate on regular five-year Treasury bonds is currently 0.45%. The “real” or inflation-adjusted interest rate on five-year TIPS is minus 1.7% (really). The difference between the two is 2.15%. In other words, the bond market is basically predicting consumer price inflation of around 2.15% a year for the next five years.
Similar calculations put the forecast at around 2.1% over 10 or even 30 years.
No, this doesn’t mean inflation is guaranteed to come in at these levels. It doesn’t mean the forecasts are guaranteed to be correct. But it means that if major inflation really is coming down the pike, it hasn’t shown up in the bond market yet.
And if it’s coming, it will. People like to make money, and if anyone knows that inflation is going to be higher than 2.1% over the next 10 years they could make money by betting on it in the bond market.
Yes, it may be tempting to worry about inflation ahead. We’re emerging from a gigantic economic crisis and the government is printing and throwing money at the problem on a scale never before imagined. The Democrats now control the White House and both houses of Congress, and are talking about more measures to reflate or expand the economy. President Biden is pushing a $1.9 trillion economic stimulus package.
Some very smart people think inflation is coming. They include Jeremy “Stocks For The Long Run” Siegel, finance professor at University of Pennsylvania’s Wharton School, and London hedge-fund manager Crispin Odey, who thinks inflation of “10-15%” is on its way. Privately, a number of serious money managers have told me they are worried about the risks of inflation.
And some, especially in the media, will point to things like the recent boom in the gold price
and silver price
or the boom in the price of cryptocurrencies like bitcoin
to suggest that “the market” is already bracing itself for higher inflation.
But until that starts to show up in the prices of regular and inflation-protected bonds, we can take that with a big dose of salt.
There is a political aspect to this debate—on both sides. Republicans and conservatives are apt to see the boogeyman of inflation coming, especially now the Democrats are in control of everything. On the other hand, liberals and Democrats are apt to dismiss the risks—for the same reason.
Some 10 years ago a group of economists and finance gurus wrote an “open letter” to Ben Bernanke, then the chairman of the Federal Reserve, warning that quantitative easing risked a return to inflation.
Their fears did not materialize. Quite the reverse. Cue a certain amount of mockery from liberal economists on the other side of the fence, such as Paul Krugman.
The inflation skeptics might be right yet again. As the case of Japan has shown, massive deficits can apparently be followed by deflation rather than inflation. But if economists really knew what was going to happen, they’d all be billionaires.
Next time someone tries to scare you about coming inflation, or tries to suck you into a debate on the subject, or tries to sell you bitcoin as a “hedge” against the coming “collapse of the dollar,” just check out the prices in the bond market. If inflation is coming, it will show up there. And until it does, there is no reason to panic.