Tuesday, May 15, 2012

With commodities at recent lows, inflation expectations have declined

The CRB commodities index broke through the apparent support level discussed earlier. Commodities continue to be pressured by the global slowdown and Eurozone driven market stress. Recent dollar strength also added momentum to the selloff.

CRB Commodities Index

With the correction in the commodities markets, US dollar inflation expectations are down sharply.  The 2x2 (two-year forward) TIPS implied inflation measure went from some 2.25% in March to under 1.5% now. As long as Europe continues to flare up and commodities are under pressure, inflation expectations should stay subdued.

2x2 TIPS implied forward inflation expectation

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