Fixed-income investors, we should point out, have been locking in negative real returns in Treasuries for some time now.
-Scott Brown, chief economist, Raymond James
The Federal Reserve began its first asset purchase program in the fall of 2008, during the depth of the financial panic. Some observers feared that the Fed’s actions would fuel higher inflation. However, the Fed is now well along in its third asset purchase program and inflation (as measured by the PCE Price Index) has remained low. In fact, Fed officials expect that inflation will trend at or below the 2% target for the next couple of years. That hasn’t stopped the inflation worrywarts from predicting that inflation is still “just around the corner.”
Inflation is a monetary phenomenon, but we observe it building through pressure in resource markets. The soft global economy has put downward pressure on commodity prices. The large degree of slack in manufacturing means that we’re unlikely to see bottleneck pressures pushing inflation higher anytime soon. Most importantly, high unemployment should continue to keep labor costs in check.