The evidence of this change can be seen across a variety of indicators – the 10-year Treasury is back below 3%, commodity prices corrected sharply in early May, gasoline prices are off by almost $0.30/gallon from their recent highs, and the TIPS spread (difference in yield between nominal Treasury and inflation protected Treasury bonds, shown in chart below) is declining. All of this is good news for consumers, and may actually help prevent the current economic soft patch from morphing into a major downturn if it helps boost spending.
The Fed is undoubtedly watching all of the above (and more) very closely. After all, one their stated reasons for launching QE2 last November was because of their concern that inflation was actually too low. Chairman Bernanke has been very clear of his determination to avoid deflation, seemingly at any cost. Therefore, if this continues for the next couple of months, don’t be surprised to hear rumblings about QE3 (you’re already hearing them from some places). Needless to say, summer is already off to a very interesting start.
Chart: 10-year TIPS spread
