Wednesday, November 19, 2008

Deflation

Global bond markets are forecasting deflation. The spread between inflation protected and ordinary bonds is negative. (I'm not sure how the graphs below are calculated -- the negative values seem too big.)



Via Paul Kedrosky.
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4 comments:

BwO said...

Careful chief, these bonds aren't all equally liquid -- relative to one another or relative to their inflation-protected counter-parts -- so their usefulness as a deflation forecast is questionable in moments of panic. Still a dramatic chart though.

8:22 AM
Anonymous said...

You've probably heard it asserted several times by now that the decline in energy costs accounts for a pretty substantial piece of the recent fall-off in prices.

So I guess this simply raises the question: If we're seeing the results of lower energy costs, does that make a deflationary spiral less likely? Of course, if one factors in consumer psychology in a recession, perhaps broad-based price declines could trigger a deflationary spiral, even if they aren't initially symptomatic of one.

11:52 AM
kurt9 said...

We had a huge spike in the price of energy and some groceries over the past year. Therefor, it is both likely and perfectly normal that the prices of these two areas should decline to the levels they were at 2-3 years ago. In other words, the inflation we've had the last 2-3 years is simply undoing itself. I see nothing wrong or bad about this.

5:41 PM
Anonymous said...

30Y swap rate today plunged 90bps at some point -- all the way to 2.69%! Lowest in 50 years....

12:22 AM

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