Deflation Probabilities

While I do not agree with the current readings of the measure – I think the measure dramatically understates the probability of deflation, as measured by the CPI – the Federal Reserve Bank of Atlanta maintains an interesting data series titled “Deflation Probabilities.”

As stated on the site:

Using estimates derived from Treasury Inflation-Protected Securities (TIPS) markets, described in a technical appendix, this weekly report provides two measures of the probability of consumer price index (CPI) deflation through 2018.

A chart shows the trends of the probabilities.  As one can see in the chart, the readings are volatile.

As for the current weekly reading, the February 6, 2014 update states the following:

The 2013–18 deflation probability—based on the 5-year TIPS issued in April and the 10-year TIPS issued in July 2008—was 0 percent on February 5, where it has been since early September. The 2012–17 deflation probability is also 0 percent as of February 5.

Prices of Treasury Inflation-Protected Securities (TIPS) with similar maturity dates can be used to measure probabilities of a net decline in the consumer price index over the five-year period starting in early 2013 or the five-year period starting in early 2012.

I plan on providing updates to this measure on a regular interval.


I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1773.43 this post is written

1 thought on “Deflation Probabilities”

  1. Since the departure from the gold standard in 1933 (event that enabled the Fed and Gov to play with monetary policy at their will) the inversion of the yield curve has been probably the most valid leading indicator of recession.
    But for the yield curve to invert, the short term yield must be significantly higher than zero.
    Such a condition is out of the plans of the Fed still for quite a long time.

    Therefore the yield curve cannot invert for several months (perhaps a few years) to come.

    Anyhow, cannot be that the absence of an inverted yield curve is a condition sufficient to escape recessions.

    I am wondering what other leading indicators (independent from the yield curve!) are as valid as that inversion.

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