No, Investors Are Not Anticipating Inflation

Martin Feldstein is the latest to write a column in the genre of “assertions about inflation that ignore obvious market indicators” with a column arguing that investor fear of inflation is widespread and “investors have responded to these fears by buying gold, agricultural land, and other traditional inflation hedges.”

I don’t really know why people buy gold, but the biggest market for it is in India where I don’t think people are hedging against rich world inflation. Agricultural land, by contrast, is clearly about agricultural demand. Growing Chinese meat consumption means more grain to feed the pigs and cows and chickens. It’s not very “traditional” since they haven’t been around for very long, but if you want to protect yourself against inflation the most on-point choice would be to buy some Treasury Inflation Protected Securities. The way TIPS work is that instead of paying a fixed nominal interest rate, they pay a fixed nominal premium over the inflation rate. One neat thing this lets us to is take the interest rate on regular bonds and subtract the interest rate on TIPS. The difference is a numerically precise market estimate of inflation over the relevant time horizon. Above I’ve plotted it on a ten-year horizon.

What you see here is that market expectations of inflation have been slightly—but clearly and fairly consistently—lower since the crisis than they were before.

Is this the last word on the likely course of inflation over the next ten years? Perhaps not. But I think it’s probably the last word on investor expectations of inflation. At a minimum, it should certainly be the first word. Moves in gold, land, and other commodity markets are interesting. But if you want to hedge against inflation, it’s easy to do so. And if you want to look up the amount of hedging that’s happening, you should look at the TIPS market. Not much is happening.