Confusion Over Fate Of Inflation Reaches All Time Record: Are Bonds Actually Wrong?

While generically completely useless, both during increases and decreases as all it is, is a reflexive and very much coincident market indicator, the UMichigan consumer confidence index does have one useful feature: it tracks respondents' 1 and 5 year inflation expectations. For what it's worth these are very volatile, but by and large trend with the moves in short-dates bonds. Indeed over the past 30 years, the 1 Year inflation expectations has tracked the moves in the 2 Year bond very closely. Until today: the 1 year inflation expectations jumped from 3.4% to 4.6%, a 1.2% jump in one month, this is the single highest monthly jump in a decade since the 1.4% jump in December 2001, following the deflationary knee jerk reaction from the September 11 attacks. But what is most interesting is that as the second chart below shows, the spread between the 1 Year inflation expectation and the 2 year bond yield is now at a record wide. This means that either consumers and bonds are at record odds over how they view the inflationary environment in the future, or that there is no real bond market in the short end (all the way up to the 2 Year bond), which is dictated purely by the Fed, and its monetization activity. We believe it is a mixture of the two, although if even US consumers for whom non-core inflation is allegedly supposed to be less of a burden (and recall Dudley's Let Them Eat iPads speach) are starting to freak out about rising prices, perhaps for the first time bonds, courtesy of central planning, may actually be wrong.

Inflation Expectations and 2 Year Yields:

And the spread between the two. We are now at an all time record.

And as John Lohman clarifies, the same divergence can be observed when comparing the One Year inflation expectation and that holy of holies inflation indicator tracked by the Fed - the CPI.