Here comes inflation

by Russ Roberts on February 12, 2009

in Inflation

Greg Mankiw notes that deflation worries have subsided and points to this chart showing that inflation-adjusted Treasuries (blue line) no longer have a higher yield (anticipating deflation) than unadjusted Treasuries:

Inflation compensation

Mankiw writes:

The negative inflation compensation that showed up a few months ago
(when the blue line was well above the red) has shrunk to about zero.
These relative yields are moving back toward a more normal, and
healthier, alignment.

I have a feeling the word "healthier" isn't going to be accurate for very long. Yes, the red line will be above the blue one, meaning that the market is anticipating inflation. But the gap is going to soon be so large that it won't feel healthier.


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