Respondents anticipate prices to climb 6.6 percent over the next year. That’s double the 3 percent inflation registered in the December survey.
As the 30-year US Tbond yield is only 4.48%, and the 3-month yield is only 0.16%, if this happens, bond and Eurodollar markets will tank. I was shocked, but then I read the fine print, and this was a survey of 800 regular Americans, in other words, people who probably don't even know what the current inflation rate is (around 1.6% for CPI's latest year-over-year number). Among experts:
The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.88 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.
If actual inflation, and economist expectations, are still around 2%, right now things are stable. But it still seems like we are drinking shots of Everclear until we become excitable, at which point there's a brief period of exhilaration, and then all sorts of pain. If economists do miss this it will be like their disastrous experience in the 1960s, where they were blindsided by the increase in inflation that decade. There were many stories of economists who then worked on macro-models and were sure inflation, and thus bond rates, would decline. They kept rising, and the next decade it only got worse.
Fed economist Eric Swanson notes a similarity between the 1960s "operation twist" and the current Fed initiative, QE2:
This paper undertakes a modern event-study analysis of Operation Twist and uses its eﬀects to estimate what should be expected for the recent quantitative policy announced by the Federal Reserve, dubbed “QE2”. We ﬁrst show that Operation Twist and QE2 are similar in magnitude.
Let's hope it's not too similar.