In the coming months bond traders will closely watch
the various measures of inflation - and the Fed's comments about them.
The various measures of inflation expectations have diverged a little of late, though the differences are not great, and most observers continue to regard the inflation outlook as benign (Table 18).
Real interest rates implied by the yields on indexed bonds, as well as the real lending rates derived using
various measures of inflation expectations, are also slightly below their long - term averages.
Not exact matches
Various measures of underlying
inflation, which typically exclude the rise in the price
of petrol, also picked up, to rates
of 0.6 to 0.8 per cent.
Various measures of core or underlying
inflation, which are less affected by these temporary factors, are also gradually increasing, and over the year to September were around 2 per cent.
As usual, I don't place too much emphasis on this sort
of forecast, but to the extent that I make any comments at all about the outlook for 2006, the bottom line is this: 1) we can't rule out modest potential for stock appreciation, which would require the maintenance or expansion
of already high price / peak earnings multiples; 2) we also should recognize an uncomfortably large potential for market losses, particularly given that the current bull market has now outlived the median and average bull, yet at higher valuations than most bulls have achieved, a flat yield curve with rising interest rate pressures, an extended period
of internal divergence as
measured by breadth and other market action, and complacency at best and excessive bullishness at worst, as
measured by
various sentiment indicators; 3) there is a moderate but still not compelling risk
of an oncoming recession, which would become more
of a factor if we observe a substantial widening
of credit spreads and weakness in the ISM Purchasing Managers Index in the months ahead, and; 4) there remains substantial potential for U.S. dollar weakness coupled with «unexpectedly» persistent
inflation pressures, particularly if we do observe economic weakness.
The introduction
of the major elements
of the new tax system in July will lead to temporarily higher CPI
inflation in the September quarter 2000, followed by a period
of time during which reductions in
various taxes flowing through to prices will reduce
measured inflation.
Various core
measures of inflation point also to a gradual increase.
The
various measures of underlying
inflation recorded slightly lower outcomes in the quarter, although on a year - ended basis they show
inflation at a similar rate to the headline
measure (Table 14; Graph 71).
It can capture the radiation precisely enough to
measure cosmological quantities without making many theoretical assumptions, detect the rippling
of gravitational waves and test
various models
of the
inflation thought to have occurred during the big bang.
The charts show the year - over-year change in
various inflation measures as well as
measures of expected
inflation based on the University
of Michigan Survey Research Center and the yields on five - year treasuries and TIPS.