US Expected Inflation: Inferred from Treasury Inflation Protected Securities

Infaltion 1
The Board of Governors of the Federal Reserve System in the United Sates expects the consumer price index to rise for the next three decades. At least this is what they let us interpret by releasing the latest nominal interest rates of Treasury Securities. Fears of both deflation and the so-called “liquidity trap” tend to disappear with the Governors’ expectations. Five years from now, the Fed expects the inflation rate to be around 1.21 percent. In seven years from this week, the Fed sees inflation hovering around 1.43 percent. Ten years from now 1.62 percent and 1.73 twenty years from this first week of January 2015. A thirty years forecast indicates an expected 1.86 percent (Graph 1).

Inflation 2

By analyzing the term structure of the interest rate and especially 5, 7, 10, 20 and 30 years maturity rates, it is possible to infer what the Fed is expecting about prices in the United States’ Economy. The maturities greater than 5 years for Treasury notes and bonds are 1.5 percent for five, 1.81 for 7 years, 2.03 percent for a decade, 2.33 and 2.59 percent for two and three decades respectively (Graph 2). Given that Treasury Inflation Protected Securities are tied to inflation, Expected Inflation here is inferred from subtracting Treasury Inflation Protected Securities (TIPS) (Graph 2) from the interest rate of Treasury bill, notes and bonds that the Board of Governor of the Federal Reserve System publishes daily (Graph 3).

Inflation 3

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