DEEP DIVE: Inflation Tends To Be Spikey

May 7, 2022 3 min read
DEEP DIVE: Inflation Tends To Be Spikey

Why is the 10-year Treasury bond yield only around 3.00% when the latest headline CPI and PCED inflation rates were 8.5% y/y and 6.6% y/y? Why would bond investors willingly lock in such a painful negative real return?

The return would be even worse if the yield were to climb to 4.00% or even higher, narrowing the gap with inflation but subjecting current bondholders to a significant capital loss.

Alternatively, the gap would narrow if inflation were to come down. Historically, inflation in the US since 1921 has been very spikey, except during the Great Inflation period from 1965 through 1980. The faster it has gone up, the faster it has come down (Fig. 13).

The current inflation spike has been led by soaring consumer durable goods prices, much like the inflation spike during the second half of the 1940s. Back then, household formation surged as the soldiers returned home, and so did the demand for housing and consumer durables (Fig. 14). Debbie and I continue to expect that durable goods price inflation will soon peak and moderate as rapidly as it jumped up over the past year (Fig. 15).

Now consider the following related observations:

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