Deflation, Disinflation, Inflation, Stagflation, ???


Today we got the March 2011 CPI inflation data and it shows that the FOMC has won (for now) the disinflationary battle they undertook with the QE2 program. The year-over-year core inflation rate has now risen for six consecutive months. The March figure of 1.19% is the highest year-over-year core inflation rate since a 1.34% reading back in February 2010. However, just because inflation has risen for six months, it does not mean we have an inflation problem. In fact, the above 20 year chart illustrates just how LOW the core inflation rate (red line) is relative to recent history. I would expect the core rate to drift higher towards 2% throughout 2011 – which is near the long-term inflation target for many FOMC voting members.

With the March 2011 headline CPI data in hand, we are able to compute the next inflation adjustment for Series I Bonds. The difference between the March 2011 and September 2010 six-month headline CPI is 2.30%. Therefore, I Bonds next inflation adjustment will be 4.6% annualized – a GREAT RATE! Unfortunately, we still expect the fixed rate on Series I Bonds to remain 0% – which is about 1/2% better than the real rate on corresponding five year TIPS!

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