Friday, May 02, 2008

Inflation conundrum

Everybody talks about inflation, but market-based measures of inflation expectations have remained remarkably stable.  We find this discrepancy between what investors talk about and what they seem to do puzzling.  ... One is that while inflation is currently a concern, most investors trust that central banks will ensure inflation stays in check over the longer term by taking appropriate action.  Another is that market-based measures such as breakeven inflation rates may be distorted by crisis-induced buying of nominal bonds and thus do not reflect investors' true inflation expectations.