Subject: Re: Krugman on the Fed
There are several things which can be expected to drive a country's local prices higher if they happened. For example a falling dollar, large government deficits, taxes on imported goods, trade disruption, or inappropriately low interest rates.
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Whew! It’s comforting that none of these things are pertinent today.

Ah, you noticed. It would seem that another burst of US price inflation is certainly possible.

In that context, the current TIPS yield at over 2% doesn't look so bad. In the sense that you'd expect people to be bidding up their prices to lock in the protection they offer, but they aren't. The five year breakeven rate (gap between bonds and TIPS) implies an expectation of inflation at only 2.44% in the next five years. (3 years ago that expectation peaked at 3.5%, so traders are expecting much LESS inflation than they were) The current figure is so modest that the TIPS seem to be the slam dunk of a deal compared to T bonds. Not that I want to own either, but somebody does.

Jim