An inflation hedge
I recently bought TIPS - Treasury Inflation-Protected Securities - for the first time. All the talk about looming hyperinflation was beginning to alarm me, and given a recent conversation with a friend who professionally manages money, it seemed justified.
Alan Blinder’s article in the NYTimes was all the more interesting: inflation, he contends, is the least of our worries. Our primary worry is still deflation, not inflation: it is amazing how until recently virtually every economist was worried about a Great Depression-style deflationary cycle. But with deficits as far as the eye can see, interest rates as low as they can possibly go, oil prices coming off their lows, it does seem like inflation could make a quick comeback.
Blinder informs us, though, that we can already see what the market is forecasting for inflation. And it isn’t that bad:
The market’s implied forecast of future inflation is indicated by the difference between the nominal interest rates on regular Treasury debt and the corresponding real interest rates on Treasury Inflation Protected Securities, or TIPS. These estimates change daily. But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-year expected rate was about 1.9 percent. Notice that the latter matches the Fed’s inflation target. I don’t think that’s a coincidence.
Perhaps my timing of a TIPS purchase was off. But it still seems like a smart hedge.
