On Friday, the market got what we (and at least a couple of other commentators) described as a “Goldilocks” University of Michigan sentiment report.
In addition to the headline gauge recovering further from a disconcerting slide in August, long-run inflation expectations printed an all-time low.
In short, buoyant consumer sentiment, expected increases in household incomes and record low inflation expectations ostensibly argue for resilient consumption and more Fed cuts, respectively. Or at least that’s one interpretation.
Read more: In Case Markets Needed More Good News, Here’s A Goldilocks Consumer Sentiment Report
But, it’s worth asking whether inflation expectations have become totally disconnected from realized inflation.
Kevin Muir – of Macro Tourist fame – highlights the following chart from one PM’s Twitter feed:
(BBG, @TaviCosta)
“My new favourite chart!”, Kevin exclaimed Sunday. “Tavi has a different interpretation than me (he admits to falling more in the deflationary camp), but this chart illustrates the ABSOLUTE DISCONNECT BETWEEN ACTUAL CPI AND FORECASTED INFLATION”, Kevin continues, adding that the “Question to ask is always ‘what’s priced in?'”
He followed that up with the following short remarks:
Inflation is the most underpriced risk out there. Don’t bother sending me your notes about the three D’s (debt, demographics and deflation from technology) – I know them. And the point I want to make – so DOES THE MARKET. That’s why Tavi’s chart is so brilliant.
Tavi’s chart illustrates clearly the market is completely complacent about inflation. Yeah, I know the deflationists will argue that it will resolve itself with a GFC-type-bust. Maybe, but true financial crises occur when something happens that NO-ONE-BELIEVES-CAN-HAPPEN.
Draw your own conclusions.
