Which Way Is Inflation Headed? Experts Disagree, So It’s Time for a Third Opinion

Thursday, April 8, 2010

You’re traveling to an important destination, so you get both your computer-mapped route and your GPS directions. The problem is, they’re widely different. Now, what? Well, you get a third opinion that can be trusted.

The same goes for inflation expectations…

On Wednesday, Fed Board Chairman Ben Bernanke said inflation remains under control. “Inflation is probably not the first thing you need to be concerned about.”

Meanwhile, Kansas City Fed President Thomas Hoenig said the Federal Reserve ought to abandon its zero interest-rate policy soon to prevent inflation from gaining a foothold….

Time to get that third opinion. Who can we trust? Answer: The bond market.

Here is the January 15 graph from “Dissecting the Yield Curve, Looking for Inflation – Yup, There It Is,” updated with April 6 data.

The result? Hoenig’s expectations are the ones the bond market supports. Not only is that rapid rate rise still inside the yield curve, the longer term rates have risen a bit more. There are now eight years of 6+% yields.

So… As investors, we should be concerned about inflation. This means few or no long-term bonds. The time for those is when the discussion switches from “Will there be inflation?” to “How much inflation will there be?”

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