Treasury Market Expects Higher Inflation. Will Hard Data Follow?

Pricing in the housing sector is rising at the fastest rate since 2004, says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. “This economy that has been really driven by stuff at home.”

Reflationistas also note that the Treasury yield curve has been steepening in recent months, presumably in anticipation that the a stronger inflationary bias is unfolding. The 10-year/2-year spread, for instance, has rebounded to 79 basis points (Dec. 9), the highest in nearly three years.

Today’s November data on consumer prices, however, is expected to show minimal if any change in the recent “lowflation” trend. The one-year change in core CPI is expected to hold steady at 1.6%, according to Econoday.com’s consensus forecast. If correct, the news will provide more evidence that inflation’s upside momentum remains hushed.

The new year could change the calculus. But with a long winter ahead of battling the coronavirus, inflation is still a low-risk threat for the near term. The Treasury market’s bounce reflects the adjusting process from the extreme disinflation pricing in previous months. Inflation will likely hold steady or edge higher in the months ahead, but it’s still hasty to assume that a hot run of reflation has started.

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