At this stage of the game – year #5 of the recovery, as measured by the S&P 500’s March 2009 low – you’d expect to see some inflation.
Consumers’ wallets should be healed, increasing demand and pushing up prices.
Employers should be hiring, driving down unemployment and propping up wage growth.
Yet, this recovery has been far from normal. And neither consumers nor employers are doing much to fuel the inflation that most Fed-watchers have expected. In fact, outside of the taper talk that drove interest rates higher between May and September, deflation is still the dominant trend.
Here are four charts I’ve shared with you before. They show the ratio of various commodity markets to the price of the 10-year Treasury bond. These plots serve as useful inflation/deflation indicators. Take a look.
Crude oil, corn, and wheat prices have clearly signaled a deflationary trend over the past two years. And gasoline, which has been the inflationary outlier, seems on the verge of cracking. No longer making higher highs (circled in red above), this ratio could soon turn much lower, joining the deflationary trend we’ve seen in other commodity markets.
Of course, you should view these ratios with an understanding of how bond rates have fluctuated this year. Here’s a chart of the 10-year Treasury yield:
As you can see, the most meaningful move in rates this year was between May and September, as 10-year rates rose from 1.66% to 2.98% in a matter of four months.
Was this the case because bond investors suddenly began anticipating a strong surge in global growth?
I doubt it.
Clearly, we can attribute the sharp rise to the Fed.
In May, everyone began anticipating the Fed’s taper plans. This speculation – that the Fed would begin buying fewer bonds in September – naturally drove rates higher and lasted through early September, when the Fed eventually squashed the plan.
Now, rates are drifting lower once again. And you can expect that to be the dominant trend through the end of 2013, and possibly into the first quarter of 2014. That’s how long most Fed-watchers expect a taper plan to be off the table. Janet Yellen’s dovish comments over the past few weeks reinforce this expectation.
As many sore gold buyers are now discovering, inflation is more a myth than a reality in this recovery.