There's an interesting report that's come out from the Atlanta office of the Federal Reserve looking at the prospects for deflation in the economy. The Atlanta Fed has long had a deflation project that takes into consideration the difference between the spreads on the five-year and ten-year TIPS, or Treasury Inflation-Protected Securities. It's a fairly complicated relationship, but basically the idea is that the ten-year TIPS protects against deflation better than the five-year TIPS, so the relative spreads should indicate how concerned investors are about the prospect of deflation.
The current reading shows that the prospects for deflation over the next five years sits at around 15 percent. That's pretty consistent with where it's been for the past couple of years; the last time the threat rose much above that was in the middle of 2010, when it peaked at around 30 percent. During the economic meltdown in late 2008 and early 2009, this measure had the likelihood of deflation pegged at about 80 percent.
And we did have a period of falling prices in there for a few months. More recently, the consumer price index has risen at 1.42 percent over the past 12 months, after increasing by an even 3 percent in 2011. It may well be that deflation is more of a concern at this point than a serious bout of inflation.
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