US inflation expectations troughed last February

We shortened the duration of our fixed-income investments some time ago because inflation expectations were forming a trough. In fact, as Chart 2 points out, inflation expectations, measured using the Fed’s supposed favorite measure of inflation expectations, actually troughed last February.

The upcoming administration has so far argued for the largest Keynesian stimulus package since the Depression, and thus the upward move in expectations for inflation and nominal growth has accelerated. The new administration’s economic package might not match that promised during the campaign, but it seems reasonable to assume that there will be more fiscal stimulus rather than less, and that the positives of fiscal stimulus will be greater than the potential negatives from the normalization of monetary policy and rising interest rates.

The reevaluation of potential inflation has occurred as well outside the US. Charts 3 through 5 demonstrate that inflation expectations have troughed in the UK, in Germany, and in Japan. The global economy is changing and may finally be recovering from the credit deflation’s crushing pressures.

The global economy is improving

The global economy might still be in secular stagnation (although we are increasingly doubtful), but cyclical acceleration is clearly underway. Leading economic indicators (LEIs) around the world are strengthening in a unified manner that hasn’t existed since the credit bubble.

Chart 6 shows the relationship between the current global LEIs to those of three months ago. If a country lies above the diagonal line in the chart, then the rate of change in that country’s LEI is stronger than it was three months ago. If a country is below the line, then the rate of change is deteriorating. Most LEIs are improving in unison, which indicates broad improvement in the global economy and an increasing chance of rising interest rates over the next year or so.