Deflation Probabilities

While I do not agree with the current readings of the measure – I think the measure dramatically understates the probability of deflation, as measured by the CPI – the Federal Reserve Bank of Atlanta maintains an interesting data series titled “Deflation Probabilities.”

As stated on the site:

Using estimates derived from Treasury Inflation-Protected Securities (TIPS) markets, described in a technical appendix, this weekly report provides two measures of the probability of consumer price index (CPI) deflation through 2017.

A chart shows the trends of the two probabilities.  As one can see in the chart, the readings are volatile.

As for the current weekly reading, the February 7 update states the following:

Prices of Treasury Inflation-Protected Securities (TIPS) with similar maturity dates can be used to measure probabilities of a net decline in the consumer price index over the five-year period starting in early 2011 or the five-year period starting in early 2012. One measure of the probability of deflation for the 2012–17 period was 3 percent on February 6, the same as a week earlier. The 2011–16 deflation probability was 4 percent on February 6, down from 5 percent on January 30.

I plan on providing updates to this measure on a regular interval.

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I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1507.19 this post is written