TIPS Spread Tumbling


As an accompaniment to Paul Krugman’s item on crying fire in Noah’s flood, take note of Scott Sumner’s point about the behavior of the 5-year TIPS spread (i.e., medium term market expectations of inflation) amidst growing concerns about Europe:


With the inflation rate currently below the Fed’s target, with the price level well below the trend, with unemployment at 10 percent, and the NGDP gap off the charts there’s just no excuse to sit idly by and watch inflation expectations fall. It’s true that the long-term deficit is a problem but undue concern about inflation today is making that problem harder to solve.