CPI Data Leave TIPS Unchanged By Tony Crescenzi RealMoney.com Contributor 5/14/2008 10:46 AM EDT

Despite the benign reading on the consumer price index and the subsequent rally in Treasury prices, inflation expectations are actually unchanged on the day, holding at a two-month high. Investors hence remain unconvinced that inflation has moved to a more moderate path.

The yield spread between the Treasury's 10-year inflation-protected securities and conventional 10-year Treasury notes is today at 2.45%, the same as yesterday and a two-month high. The spread was recently as low as 2.25% but has been on the rise because of the continued rise in commodity prices (the Reuters/Jefferies CRB index reached a record high on Friday).

The inflation expectations that reside in the financial markets are of course important, but more considerable weight should be given these days to inflation expectations in the general public. In this regard, inflation expectations are very high, which in the University of Michigan's consumer sentiment survey reached a 25-year high of 4.8% in April.

Not only is that level high enough to erode confidence in the economy, it is also high enough to influence inflation, which is affected strongly by inflation expectations. Keep in mind, of course, that consumer expectations are tilted more toward overall inflation rather than core prices, which is what the financial markets focus on.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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