TIPS Options Indicate Inflation Should Remain Tame For Another Year, Possibly Two

Monday, October 01, 2012 09:16
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TIPS Options Indicate Inflation Should Remain Tame For Another Year, Possibly Two

Tags: Federal Reserve | inflation | Treasury bonds

To get the real story on the threat of inflation, take a look at the options market. Truth is, expectations for rising consumer prices measured by Treasury Inflation-Protected Securities (TIPS) are signaling that inflation will remain tame at least for another year or two.

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This gives Fed chief Ben Bernanke time to strengthen the economic recovery without feeling pressured to increase interest rates.
 
Treasuries have returned 41% since mid-2007 if interest payments were reinvested. Even fears regarding the Fed’s third quantitative easing have not derailed bullishness of analysts and economists on bonds.
 
The Fed has three decades’ worth of inflation management credibility, going back to Fed chief Paul Volcker. Bernanke says the Fed’s policies are not designed to intentionally ignite inflation but to support the economy in bringing the unemployment rate down over time.
 
Investors concerned about inflation are primarily looking at medium-term to long-term inflation, two to five years out. There seems to be no immediate threat of wage inflation, which is the form of inflation the Fed fears the most.

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