The Future of Inflation

The latest data on the core inflation rate was released this week, along with a report from the Federal Reserve Bank of Cleveland on its expectation for inflation over the long term. In the near term, the inflation expectation for the next 12 months is 1.34 percent. Over the longer haul, the Fed expects inflation to average just 1.84 percent over the next ten years. That's the lowest this figure has been in decades.

The Cleveland model is based not just on the spreads built into TIPS securities, which can offer a hint into what the collective market sees as the breakeven point for inflation, but also uses other models to incorporate investors' appetite for risk and trends in interest rates. The fact that this stuff is being produced by some of the brightest economists at the Fed puts a stamp of authority on it.

Inflation fears were rampant after the Obama Administration's stimulus plan passed, since massive government deficits are considered a cause of inflation. The Fed's ultra-low interest-rate policy can be seen as a success in this context, since one of its purposes is to ward off inflation. With these inflation estimates from another arm of the Fed coming in so low, it will be interesting to see if the Fed adjusts its policies any.