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Economy in Brief

Inflation Expectations Rise
by Tom Moeller June 7, 2006

Inflation expectations were piqued this week by Fed Chairman Bernanke's comments that the three-month and six-month core PCE inflation figures at 3.0% and 2.3% were "unwelcome developments."

As a result, the yield on the inflation-protected Treasury note rose to 2.44% from 2.40% on Monday but the yield on the nominal security fell to 5.01%. The so called TIPS spread narrowed to 2.57% from 2.62% on Monday.

Bernanke's comments implied that more inflation pressure existed than had been perceived but that the Fed would combat those pressures more forcefully than previously expected.

The rise in the TIPS spread this year has followed a rise in 12 month inflation expectations to 4.7% in May from 3.8% in January, as surveyed by the University of Michigan.

Inflation Expectations: How the Market Speaks from the Federal Reserve Bank of San Francisco is available here.

How much work the Fed still must do to contain inflation is the $64,000 question. Already it has lifted short term interest rates by 400 basis points to 5.0%. More action might be suggested, however, by a recent pickup in the y/y growth of the monetary base (liquidity) to 4.6%. It had slowed previously to 3.2% from 5.8% late in 2004. In addition, the "real" Fed funds rate fell as the three month growth in "core" PCE prices tripled to 3.0% in May versus last August.

The Shadow Open Market Committee can be visited here and its Policy Statement from May, 2005 can be found here.

Treasury Inflation Indexed Securities 06/06/06 06/05/06 12/31/05
10 Yr. Treas. Note at Constant Maturity Due 1/15/16 2.44% 2.40% 2.06%
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