Friday, February 26, 2010

TIPS expected inflation

Often I see bloggers say that expected inflation is low, because treasury securities have similar yields regardless of whether they are indexed for inflation (inflation adjusted Treasury securities are called "TIPS").

The logic to the calculation makes a lot of sense, and the Cleveland Fed appreciated the logic so much that they sponsored an expected inflation estimate. But here's what the Cleveland fed says now:

"TIPS Expected Inflation Estimates
October 31, 2008
We have discontinued the liquidity-adjusted TIPS expected inflation estimates for the time being. The adjustment was designed for more normal liquidity premiums. We believe that the extreme rush to liquidity is affecting the accuracy of the estimates."

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