Markets beginning price in US inflation stabilizing

As evidence continues to emerge that US labor markets are gradually healing and wage growth is starting to stabilize (see story), market participants as beginning to consider the possibility that inflation in the US has stabilized, albeit at low levels (see post). Other signals seem to pint in the same direction.

Outside of China-driven raw materials weakness, commodity prices are off the lows and rising, though remain at depressed levels relative to the past five years.

DJ UBS Commodity Index

Americans are starting to pay attention to rising prices, particularly as some of the more visible commodities such as coffee or gasoline become more expensive.

June 2014 gasoline futures (RBM14) (source: barchart)

This sentiment is reflected in the rising Google search frequency for the word "inflation" and will likely show up in the surveys such the UMichigan inflation expectations over the next few months.

Google Trends: search term "inflation"; United States search only

The markets are starting to take notice. The latest TIPS auction showed a sudden increase in investor demand.

Bloomberg: - The U.S. sale of $18 billion in five-year Treasury Inflation Protected Securities drew the strongest demand ever from a class of investors that includes foreign central banks.

Indirect bidders bought 58.4 percent of the securities at the TIPS sale. That compared with an average of 42.3 percent at the past 10 auctions. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.7, matching the highest level since December 2012. The notes sold at a yield of negative 0.213 percent, below the negative 0.162 percent average forecast of five of the Fed’s 22 primary dealers in a Bloomberg News poll.

“The stats were off the charts,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer, said in a telephone interview.

The five-year breakeven rate (a rough measure of implied inflation expectations) jumped as a result.

Source: Ycharts

Clearly we've had these "false starts" in the past, just to end up staring in the face of disinflationary pressures. But this time conditions seem to be in place for a stabilization in the rate of inflation.

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