A relatively obscure gauge of inflation (in terms of mass media coverage) had an unexpected uptick today. The Institute for Supply Management (ISM) Report on Business Prices Paid Index came in about 11% higher than expected (55.5 vs. 50). The index is defined as follows: "The ISM index includes prices paid for all purchases including import purchases and purchases of food and energy excluding crude oil"
The unprecedented accommodation by the Fed and some stability in emerging markets economies will continue to push prices up. Of course the Fed has a 2% inflation target these days, so they are fine letting some inflation filter through. But what does that mean for longer term rates?
This chart compares the 10-year treasury yield (orange) with the Prices Paid Index (white). The divergence in trends is clear. As prices recover relatively quickly from the October lows, treasury yields at these levels are not sustainable.
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| ISM Report on Business Prices Paid Index vs. 10y treasury yield (Bloomberg) |
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