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Saturday, October 17, 2009

Expected Inflation TIPS Spread Calculation

Bob Brinker often talks about expected inflation on his radio show Moneytalk. This article explains how to do the calculation.

From Calculating Expected Inflation using the TIPS Spread

Expected Inflation or TIPS Spread is the difference between nominal US Treasury bond rates and rates on US Treasury Inflation-Protected Securities. This spread is an indicator of expected inflation. The current rates are listed in table at the end of this article.
This graph shows expected inflation vs. the growth rate of ECRI’s FIG going back to 2004.
Expected InflationTIPS Spread Graph

ECRI FIG: The Economic Cycle Research Institute, ECRI, monitors over 100 cyclical indexes for major economies and uses the data in effort to make economic forecasts. ECRI's U.S. Future Inflation Gauge, US-FIG,is designed to anticipate cyclical swings in the rate of inflation. On Oct. 2, ECRI’s US-FIG rose again from its March 2009 51-year low to an 11-month high. ECRI's managing director, Lakshman Achuthan, said "the upturns in the US-FIG and its components have become fairly pronounced, pervasive and persistent. Thus, while this is not yet a significant policy concern, U.S. inflation is on the cusp of a cyclical upswing.”

Supply and demand issues can distort the TIPS Spread so buyers need to beware. For example, the Federal Reserve has been busy buying US Treasuries to help banks. The TIPS spread could widen when the Fed stops buying treasuries or goes into tightening mode.

U.S. Treasury Rates - 10/15/09

3-Month0.00001/14/2010 0.06
2-Year1.00009/30/20110 .95
5-Year2.37509/30/2014 2.35

TIPS - 10/15/09

5-Year1.25004/15/20140 .71

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