This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Global Macro: Inflation Indicator Falls Ahead of Fed Meeting

Stock quotes in this article: TIP, IEF

NEW YORK (TheStreet) -- Expectations for greater inflation are drifting lower ahead of Wednesday's Federal Reserve policy decision.

One inflation indicator is iShares TIPS Bond (TIP) over iShare 7-10 Year Treasury (IEF). The indicator measures the market's expectation for future inflation based on the strength of bonds that track a basket of consumer prices, compared with a normal Treasury bond index.

When the indicator moves higher, it signals that the market is pricing in greater inflation. When it declines, it signals the market is pricing in a deflationary environment.

Last June, the pair reached its bottom, weeks after Fed Chairman Ben Bernanke hinted that the Fed would begin to cut stimulus. Financial markets were relying on loose central bank policy, and any suggestion of a tighter policy led to a panic that interest rates would rise sooner than expected.

Since 2012, inflation readings have been consistently below the Fed's 2% target. The possibility of a rate increase turned the focus to possible deflation, pushing already low inflation even lower.

Since the financial crisis, economic data have steadily improved due in part to increased stimulus, but consumer prices have failed to rebound as quickly.

Over the past few months, economic growth has remained gradual, and the labor market has produced mixed results. It will take much more improvement on both fronts for consumer prices to trend higher. A gradual recovery can keep markets happy for only so long.

The TIPS inflation indicator shows that the sudden drop in the pair may have been an overreaction, but that the overall trend of lower inflation is correct. The indicator has continued to drift lower since late August, even though the Fed didn't cut bond purchases till its December meeting.

Many analysts believe more stimulus cuts will come this year, which could continue to weigh on the indicator. The TIPS indicator could decline significantly this Wednesday if the Fed cuts quantitative easing to an expected $65 billion a month.

If the Fed keeps its bond purchases at $75 billion a month, it is hard to see the indicator spiking that much higher, considering cuts may come in the following months.

Ultimately, it is going to take a strong push from both economic growth and an improved labor market this year to get prices in the economy moving higher again.

TIP ChartTIP data by

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,042.90 -28.32 -0.17%
S&P 500 1,972.29 -5.51 -0.28%
NASDAQ 4,493.39 -12.4620 -0.28%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs