Stories reflecting inflation concerns are once again proliferating.

Today’s inflation concerns represent the third in a series of inflation scares since the crisis began back in November of 2007. The first inflation panic occurred back in March of 2008 as energy prices moved aggressively higher. Fear took over as investors, convinced that 1970s style inflation was imminent, paid increasingly higher premiums for inflation protection. In the middle of the frenzy, the yield on 10-year TIPS declined to 0.91% on March 10, 2008. By October 31, 2008 10-year TIPS had risen to 3.14% as global aggregate demand slowed and energy prices declined. The second round of inflation concerns developed in the spring and summer of 2009, an outgrowth of the “green shoots” phenomenon where each piece of positive news signaled a robust economic recovery and rising inflationary pressures. 5-, 7-, and 10-year TIPS that began January yielding 1.97%, 2.12% and 2.29% declined to 0.81%, 1.09% and 1.45%, respectively, by October 7, 2009. During this period both headline and core inflation numbers were well contained. Inflation concerns have once again reemerged reflecting the trifecta of stronger economic growth, enormous deficits, and rising commodity prices (including food and energy). On February 1, 2011 5-,7-,and 10-year TIPS were yielding 0.01%, 0.59% and 1.08%, respectively.  Read More