Silly Headline Alert

Jonathan Clements

INFLATION ROSE JUST 0.1% over the 12 months through June, as measured by CPI-U, the most popular inflation measure. But that tiny increase is a bad guide to the future, because it’s held down by the 15% plunge in energy prices over the past year.

So what should we expect? A better guide is CPI-U with food and energy excluded, which rose 1.8% over the past 12 months. Better still, take your cues from the Treasury market.

If you take the yield on the 10-year Treasury note and subtract the yield on 10-year inflation-indexed Treasurys, you have investors’ collective guess for inflation over the next 10 years. The reason: Like investors in conventional Treasury bonds, holders of inflation-indexed Treasurys receive regular interest. But on top of that, the principal value of their bonds is stepped up along with the inflation rate.

Assuming a rational market, both conventional and inflation-indexed Treasurys should be priced to deliver the same return. Thus, with conventional 10-year Treasurys yielding 2.3% and inflation-indexed Treasurys at 0.6%, you have your forecast for inflation over the next decade: 1.7% a year.

While we’re on the topic of inflation, here’s an early warning on one of this fall’s stupidest headlines. In late October, the Social Security Administration will announce how much Social Security retirement benefits will increase for 2016, based on recent inflation, as measured by CPI-W. In all likelihood, the increase will be extremely small, and there may be no increase at all, which is entirely justified given the past year’s low inflation rate. The media’s predictable reaction? “Social Security Says No Raise for Retirees in 2016,” or some similar headline that suggests seniors are getting ripped off by the federal government.

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