Don’t be afraid of inflation… We’re not

February 15, 2011 Categories: Economic Insights
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U.S. Breakeven Inflation Rate

Source: Bloomberg, Russell Investments. As of 1/17/11. Breakeven inflation rates are derived by taking the difference between the respective yield on the U.S. inflation protected security versus its comparable nominal U.S. fixed income security.

Inflation seems to be a topic that everyone is talking about. At Russell, we’ve been doing a lot of talking – and a lot of thinking – about it as well.

We do not see a high probability of the late-1970s style of inflation, nor do we feel that deflation is very likely. The Federal Reserve is working hard to avoid deflation and we expect to see inflation move up to the Federal Reserve’s stated 2% ceiling over the course of the next few years. As you can see from the breakeven rates in the graph above, the market expects us to reach 2% inflation in about 6 years. (If you’re interested in learning more about breakeven inflation rates, please take a look at Frank Pape’s post from Decemeber).

Editors’ note, December 2013: a previous version of this blog post offered a link to additional research papers that have since expired.

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