Expected Inflation

Inflation is of grave concern to both consumers and investors alike. Inflation impacts not just spending capabilities but also real returns of assets. As such, economists measure inflation with great fervor. The most looked after inflation indicator is the CPI (consumer price index). It measures the changes in the price levels of consumer goods and services purchased by households.

While we do know of past inflation information as they’re regularly published in the press and the net, what we are more concerned with is the expected inflation. This forward-looking, non-deterministic data is however, easily gotten for the USA economy. USA has a large liquid homogenous national debt market which is in general considered as risk free. We can derive the expected inflation data from delta of the nominal bonds (treasury bonds) and TIPS (treasury inflation protected securities) yields as published currently.

To give an example, the current 10-year and 30-year yields of TIPS are -0.13% and 0.87% respectively. The current 10-year and 30-year yields of nominal bonds are 2.18% and 3.27%. Thus, to arrive at the expected inflation, we subtract the nominal yields of bonds with the TIPS yields. The expected inflation over the next 10 and 30 years are thus 2.31% and 2.4%. As can be seen, the difference between 10 and 30 years’ expected inflation is not that great. This reflects the stable nature of long-term expected inflation.

The expected inflation data derived as such belongs to the consensus of the US debt holders in general and should be pretty authoritative as a vote by the free market system under the command of the invisible hand.

We can take the USA expected inflation data from here and project the expected inflation for Singapore. I do not know how to project an accurate expected inflation for Singapore but my gut feeling is that it should not differ too greatly from the US data since both of us are major trading partners and cross-country investments and travel are high.

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