May 26, 2020

Fathom’s Chart of the Day 26.05.2020: US medium-term inflation expectations

by Fathom Consulting.

The five-year forward inflation expectations dated five years ahead continue to show inflation lower in expectation that it was before the virus struck. That judgement, embedded in bond prices, implies that markets believe the negative impact on aggregate demand of the virus and the global policy response to it will exceed its negative impact on aggregate supply in the medium term. This remains a puzzle to us: the demand effects are huge in the short term but, once the virus has run its course and the policy stimulus has kicked in, the demand side should recover. But the same might not be true for the supply side: global supply chains are likely to be permanently shorter as a result of this shock, and global connectivity permanently reduced, which is (if anything) a permanent negative shock to aggregate supply. The net effect of unchanged aggregate demand and reduced aggregate supply in the medium term ought to be positive for inflation. In Fathom’s view, markets are currently understating the medium-term risks to inflation.

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This chart is taken from our Recovery Watch newsletter. Click here to subscribe to Fathom’s Recovery Watch and receive invitations to regular Recovery Watch Forums and participate in lively discussions with our team and others in the community.

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