Reported inflation

Having laid out the importance of expected inflation and TIPS breakeven rates, let’s turn back to reported inflation and see whether it actually behaved similarly. It is not at all unusual for a market to rise in the present while its expectations for the future fall; this happens regularly in backward Ted physical markets.

The behavior of reported inflation is consistent with that of expected inflation. If we map the year-over year changes in the monthly average of the CNY against the year-over-year changes for both the CPI and the PPI, we find an inverse leading relationship. As the CNY moves higher, the rates of change for the two price indices fall two months later.