Global Macro: Inflation Indicator Falls Ahead of Fed Meeting

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.

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