Economists still have a battle raging between the slow growth and fast growth groups. The slow growth economists are basing their belief on current indications of trouble in commercial real estate, housing, and banking that will take some time to resolve. The fast growth economists are basing their argument on market-generated expectations like the steep yield curve (mentioned again today in another article in the Wall Street Journal).
Yet another market-generated indication comes from the markets for Treasury Inflation-Protected Securities (TIPS). According to an analyst quoted in this Bloomberg article:
The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.
The market, pretty clearly, is expecting faster growth accompanied by some inflation. Of course, market expectations are not always correct—and you can expect some turbulence in the market if expectations are thwarted and have to be readjusted. Maybe in a year or so we will know the answer, but it’s worth noting that the data generated by the market has been correct more often than the economic talking heads.
