March 30, 2011

Rising oil prices not enough to spark inflation concerns

Garett Jones

Senior Research Fellow

Rising food and gas prices have brought fears of inflation back into America’s psyche, but while it is important to pay attention to these prices, they’re not the only gauge of inflation. 

You want to look at all the indicators.  You don’t judge people’s overall health just by their temperature.  It’s one thing, but it’s not the only thing.  The tip spread is the one people should pay attention to.

The tip spread is the difference between regular 5-year treasury bonds, and the treasury bonds that pay more at times of inflation.  If people are willing to pay more for treasury protected inflation securities, that means they believe inflation is going to be high, and they are willing to pay for inflation protection. 

Right now the gap indicates there is maybe 2 percent inflation expected over the next 5 years.  Inflation has risen, but inflation is still lower than it was before the financial crisis.