The median Cleveland Fed CPI series in August came in at the grand total of +0.05% month-over-month and has been +0.1% or lower now for 12 months. That is close to price stability as you can get without actually slipping into a deflationary state. In fact, the year-on-year trend in this index was +1.7% a year ago, +1.2% at the end of 2009, and now sits at +0.5%; that’s fifty basis points shy of deflation.
Look Chart 2 and tell us ...what is exactly going to stop it [inflation] from heading below zero ...the Fed does not think that deflation is a serious enough risk to do anything right now beyond keeping its balance sheet stable....
At +0.5% on the underlying CPI (according to the Cleveland Fed measure), it is tough to call the bond market in a bubble. In a bubble, you don’t see headlines like these making the Wall Street Journal (Bond Markets are Growing Riskier and Treasurys Can Be Painful, as History Shows). If the real rate approximates the trend in real GDP at around 1%, and assuming some reasonable level for the term premium, then it would certainly be appropriate for nominal bond yields at the long end of the Treasury curve to enter a 2.0-2.5% range before the bull market in fixed-income runs its course.
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