Why Are Inflation Expectations So Low?

Over at The Baseline Scenario, there is an article on inflation expectations.  I do disagree with a couple of points, but it’s a good primer.  At the bottom of the article, James Kwak notes that inflation expecations are in the 0.6% range and for inflation-adjusted bonds, the spread is negative in the short term (meaning that people expect deflation over the next few years).  Given the vast increase in high-powered money in the economy and the political incentives at the Federal Reserve not to take all of that out when things start picking up and individuals’ money demand decreases, there is a high likelihood of major inflation.  The only scenario I can see that would justify these inflation expectations would be if investors expected either a very long-term recession (going on several more years) or some major negative shock.  Otherwise, it seems like there’s a good opportunity to make some money shorting the inflation market.

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