UPDATE II: Oh, Lord. The daily picture was right to begin with -- or I managed to sneak in another mistake. Anyway, I swear its right now. Thanks to jfund (in the comment section) and Bethany (my favorite RA named Bethany ever.)
UPDATE: My colleague Chuck Carlstrom caught a mistake in the original post -- I had mislabeled the series in the chart based on daily TIPS yields. All fixed now.
Bloomberg's Daniel Kruger thinks so (hat tip to Ken Sutton, Chicago XP77er and Senior Partner, Quantimetric Systems LLC):
Rising oil prices, Mideast conflicts and a U.S. president perceived as ineffective contributed to the stagflation of the 1970s. Today, in the bond market, where Yogi Berra's immortal lines are increasingly invoked, "it's deja vu all over again.''
Nowhere is that more evident than with Treasury inflation- protected securities. The difference in yields between 10-year TIPS and conventional notes has widened to about 2.5 percentage points, a seven-month high, and up from 1.43 percentage points in 2002...
Investor confidence in the Federal Reserve's ability to restrain inflation, as measured by TIPS, peaked in October 1998, when the difference between the inflation-linked notes and 10- year Treasuries narrowed to a record low 0.647 percentage point.
I've discussed potential problems with the standard TIPs-based measure of inflation expectations before, but I guess this would be an ideal time to revisit that argument. From the Cleveland Fed:
In theory, the yields on two different kinds of Treasury securities—nominal treasury notes and treasury inflation-protected securities (TIPS)—can be used to calculate a market-based estimate of expected inflation. Nominal treasury notes earn a fixed nominal rate of interest on a fixed amount of principal, whereas the principal of TIPS is adjusted for inflation (and thus so are the coupon payments). Because the return on nominal treasuries is vulnerable to inflation, it most assuredly contains compensation to investors for any losses they expect to incur from inflation if they hold the bond. TIPS therefore protect the bondholder from losses due to inflation, but nominal treasuries do not. Whereas nominal treasury notes earn a fixed nominal rate of interest, TIPS earn a fixed real rate of interest. In principle, one ought to be able to simply subtract the real yield on TIPS from the nominal yield of treasury notes of the same maturity to derive expected inflation...
There are actually 2 different factors that cause TIPS to be a biased predictor of expected inflation: an inflation-risk premium and a liquidity premium. To make matters more difficult, these biases likely go in different directions. We attempt to correct for both of these biases.
If you are interested in how those corrections are made you can follow the link above. If you are in a trust-without-verify mood, here is the history of TIPS-derived inflation expectations, with and without adjustments for inflation risk and liquidity premia:
The jump in inflation expectations commencing in mid-2003 only shows up in the unadjusted calculations: If you believe the Cleveland bias adjustments, expectations have been relatively stable since at least 2001 -- and show no discernible sign of a sustained increase.
The graph above shows monthly averages, so the "seven month high" referenced in the Bloomberg story does not show through. It's there, but that benchmark doesn't look that impressive in the context of the normal fluctuation in these measures:
I'm not one to argue that all is hunky-dory with the current inflation situation. But I do think the evidence supports the proposition that inflation expectations remain well-contained.