Inflation Expectations, Post-Passage of the American Rescue Plan

At the end of the week, the five year constant maturity Treasury yield continued to rise along with the implied expected inflation rate; but after accounting for the estimated term premium and liquidity premium (h/t Bob), the increase in the latter since the Georgia elections is much more modest.

Figure 1. Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by term premium and liquidity premium per DKW, all in %. Source: FRB via FRED, KWW following D’amico, Kim and Wei (DKW), and author’s calculations.

The unadjusted 5 year Treasury-TIPS spread is:

Where tp is the term premium on the Treasury yield, and the lp is the liquidity premium on the TIPS yield. Using the DKW estimates of the Treasury term and TIPS liquidity premia as reported by Kim, Walsh and Wei (2019, data 2021), one obtains the following estimates of expected inflation show as the red line above.

As of 2/26/2021, the unadjusted series is 0.58 percentage points higher than the adjusted; that is the expected inflation rate over the next 5 years is 1.8% instead of 2.4%. If the gap between the two premia has remained constant (no reason that would be true), then expected inflation remains below 2%.

35 thoughts on “Inflation Expectations, Post-Passage of the American Rescue Plan

  1. AS

    Professor Chinn,
    I looked at the Excel spreadsheet. Would you mind sharing which columns you used to calculate the adjusted breakeven? It seems a bit difficult to merge the equation above with the Excel spreadsheet.

      1. AS

        Professor Chinn,
        I think that I am the slow person in the class.
        Any chance you would show a numerical example for the calculation, perhaps using the data from 2/26/2021? It would be instructive for this class member to be able to make the calculation.

  2. Moses Herzog

    Doesn’t this kind of verify that inflation is not going to be as bad as some people are asserting right now?? Or since the red line is still moving up “we don’t really know”?? I still don’t think it’s going to be any higher than 2.75% on an annual basis (and that 2.75% I am even shifting up from my best guess, so as to have more certainty), and this reminds me of some of the people who were trying to bad mouth President Obama’s recovery packages, you had folks on ZH blog, and I specifically remember going at it with Bruce Krastings that the inflation fears were a joke, and they were. My main argument (among other sub-arguments) would be how can you expect inflation to rise in a significant fashion when you have the high “LFPR”(CIVPART, whatever you wanna label it) that America has right now?? Who in the F is going to drive up prices on these products, Eric Trump?? This is a laugh riot in my book. Right up there with some sh*t-head telling us this was going to be a “V” recovery. Asinine.

    1. pgl

      Didn’t you know? Nobel Prize winning Dr. Mitch McConnell just declared we have been in a strong recovery before Biden became President. And of course the late 1990’s tech boom was caused by the 1981 Reagan tax cut!

    2. Dr. Dysmalist

      Yeah, I don’t see inflation above a 3% rate year-on-year either. Don’t worry, though. The deficit-hawks-but-only-during-a-Democratic-Administration will keep Chicken-Littleing right up to the start of the next recession, at which time they will say, “See, we told you that it would cause a recession!” Our spinning heads will likely not be optional. Boys and girls, can you say gaslighting? Sure, I knew you could!

    3. Barkley Rosser


      Oh I should probably just ignore this, but it occurs to me that you may be referring to me when you mention “some shi*t-head” above. As it is, before the GDP began to turn around and go back up I was not forecasting a V but was with Menzie and most here expecting a slow recovery that would later pick up. I only started saying that it looked like a V after data came out that supported that, initially that record increase in consumption that happened last May that you ridiculed many times, although Menzie had to correct you on that as I was correct on that.

      As to whether or not it was a V depends on whether ort not one insists on it having to maintain its rapid rate of reboud all the way back up to the level it started down from before it flattened, a position held by Menzie and Not Trampis, both of whom seem to agree that it was looking like a V until it flattened too soon.. I expected it to flatten before it got all the way back, which is what happened. But anybody who looks at a graph of the path of GDP can see something that over the second and third quarters looks much more like a V than anything else, even if its rebound petered out before it got all the way back up. But then again, perhaps the s-head you had in mind was one of the Trump admin backers who ran around ahead of time predicting that it would be a V-shaped recovery, not anybody who only got around to calling it V-like once data began appearing that made it clear that it was looking like that at least for awhile, which would apply to me.

  3. pgl

    Senator RonJon wants us to believe that 1/6 was led by Antifa. RonJon said he was not afraid since white rioters love the police and are law abiding citizens. Now had they been BLM types, he would be very afraid. This racist Senator needs to meet this dude:

    Navy investigators found contractor in Capitol riot was known as a white supremacist – A supervisor for Timothy Hale-Cusanelli told investigators she had to admonish him for sporting a “Hitler“ mustache.

    A U.S. Army reservist who participated in the Jan. 6 Capitol riot was widely known as a white supremacist and regularly discussed his hatred of Jews while working at a New Jersey-based naval facility, according to new evidence revealed by federal prosecutors late Friday. The reservist, Timothy Hale-Cusanelli, who worked as a security contractor at Naval Weapons Station Earle and held a secret-level security clearance, was arrested and charged Jan. 15 for allegedly breaching the Capitol. At the time, prosecutors described him as an “avowed white supremacist” and Nazi sympathizer, a determination based in part on evidence provided by a confidential source to the Naval Criminal Investigative Service and a YouTube channel in which Hale-Cusanelli expressed those views.

    1. Moses Herzog

      Where does Ron Johnson say it was led by Antifa??

      I thought this story might be interesting to commenter “JohnH” if he’s still out there reading:

      The DNC are going to see more and more of this, with Nancy Pelosi funding opposing candidates to progressives. She thinks she can opposition fund people who are tired of her infantile running of the party. Nevada is not going to be an isolated case. She and/or her replacement can fund progressives and “ride the wave” or she can be tossed to the funeral heap and be remembered by about 5 women who think she is a “feminist” by obstructing effective women like Ocasio-Cortez. Her and Nancy Wasserman Schultz’s legacy is already written, so it really makes no difference for her memory either way.

      1. Barkley Rosser


        Your link says nothing about Pelosi. I would note that it says that the opponent of the new state Chair is also an old Bernie story. We know that you have an irrational hatred of Pelosi, but this talk of her being “tossed” on a “funeral heap” does seem a bit over the top here.

      2. pgl

        You are RonJon’s defense attorney now? No – this was not his 1st dishonest statement about 1/6. Do try to keep up.

          1. Moses Herzog

            Gee wiz, Wonkette, who could argue with such a well respected institution of journalism?? And this is why you’re unfamiliar with the fact Pelosi kills off Progressive Democrats by funding their opposition?? Too busy reading a site whose predominant message is “Nyaaa!!! Nyaaa!!! Tag!! Yooooou’ve got the cooties now!!!!” Don’t slobber on your own shirt when you read that wonkette “red meat” for morons, it’s bad for the New York mystique if people see you slobber on your shirt while reading salacious headlines on your laptop. I do see where you’ve picked up most of your language skills though. Really classy headlines there.

            What’s it say in small digital pixels under the “wonkette’ website insignia?? “Funded by Andrew Cuomo fanboys with too much time on their hands since 2004”. Weird.

      3. pgl

        “The DNC are going to see more and more of this, with Nancy Pelosi funding opposing candidates to progressives.”

        Nancy Pelosi? Are you now Bruce “I refuse to read my own links” Hall now. Try Judith Whitmer of Nevada. Pelosi is from San Fran which is in California BTW. Yea we know you hate old ladies who refuse your advances but damn – learn to read.

        1. Moses Herzog

          @ pgl
          For a person who no doubt views themselves well-versed in politics you are in credibly DUMB on some of the machinations of it. Pelosi has funds she oversees, and chooses where those funds are to be distributed in many races across the nation:

          So it’s something which pertains to EVERY race around the nation, even the more local races, (Which is why you see Harry Reed mentioned, even though he is retired, because that power and funding ability can flow downward) and also to what happens in campaign funding (or lack thereof) in Nevada or any state you care to mention. It’s a well known fact Pelosi funds opposition candidates to Progressive Democrats, and if you could read better quality sources than “DailyVoice” and “TPM” (are you reading Quora now too??) you’d know that.

          1. pgl

            As a leader in the party – having some say over a lot of campaign funds is expected. But funds overseas? You make it out like she is cheating on taxes. Of course you link does not say that. So you are Bruce Hall Jr.

          2. Moses Herzog

            @ pgl
            You don’t know the difference between the verb oversees and the adjective overseas?? And you’re on here complaining about others’ reading comprehension?? I think most of my non-college semi-truck bros could tell you the difference.

            You’re becoming the gift that keeps on giving.

          3. Barkley Rosser

            Oh dear, Moses. You have off-topic denounced Pelosi because she is allegedly going after Bernie people who are taking control of the Nevada stare Dem party and provided a link about the fight within that state party, but one link with nary a mention of Pelosi.

            Now you provide two links that talk about Pelosi a whole lot and about her Super Pac that provided funds for Dems running for House seats in the 2020 race, something well known that she did and exactly what one would expect a Speaker of the House to do trying to preserve her majority and thus her position. Dems did not do as well as expected, but she did manage to hang on to her majority.

            But what was missing in both of these links was any mention of her messing around in the fight over who controls the Nevada state Dem party. I think I saw something saying she was not happy about events there, but it does not seem she did much about it. You have just gone off again on her, dragging in rank silliness from the 2016 race, regarding which you are more obsessed with than even Hannity and Trump, much less Bernie Sanders whom you claim to admire so much.

            You had managed to avoid mentioning her when you recently went off on your off-the-wall rant against Tanden over her meanie tweets, during which you also dragged in Hillary Clinton whom you also hate, your famous gut instinct. You went on and on about Tanden. But no, you just cannot resist going after these women you hate, so here you have been again, off-topic of course, pushing out another off-the-wall rant against Nancy Pelosi, putting up links that do not support your rant. Really, Moses, cool it. Are we going to see you denouncing soon even more of the other women you have denounced with such inaccurate gut instinct? Please. Leave it alone. This stuff just gets sick.

      4. JohnH

        Clinton’s policies of the 1990s are increasingly being repudiated.

        For now the attacks are focused on the crime bill and on welfare reforms. However, a bigger repudiation came in the form of Biden’s rescue plan, something unimaginable for Democrats for the past quarter of a century.

        While critiques of Democrats’ neoliberal economic policies have not yet gained high visibility, they are there: Stiglitz’ “Globalization and its Discontents,” and Appelbaum’s “The Economists’ Hour,” which also takes economists to task for excessively marketed oriented policies.

        I am feeling increasingly feeling vindicated for not voting for Democratic presidential candidates for the past quarter century. Economists like pgl need to seriously reflect on their need to put economic dogma over the general welfare and political party over principle, his constant defense of Obamausterity being just one example.

        1. pgl

          Do you wake up every morning searching for another dishonest rant to attack me or what? Get a new gig dude as you have turned into the ultimate in boring.

    1. pgl

      Larry Schwartz is distributing NYC’s vaccines based on loyalty to Randy Andy?

      This is the kind of crap I would expect from Trump not Cuomo. #1 – I’m glad I got my first Pfizer dose and will get my 2nd soon. #2 – NYC may be in danger of being shortchanged if this is true, which would be beyond criminal.

      I have refrained from blasting Randy Andy but if this is true – he must go. And maybe be prosecuted for abuse of power.

    2. Moses Herzog <<—- pgl's comment in September <<—-pgl's comment in July

      “A little good news from NYC on the restaurant situation. A lot of the Park Slope (Brooklyn) ones were serving food that people enjoyed sitting at tables outside. I’m just hoping our very careful governor does not freak out at what is happening in other states. We are pulling through and slowly reopening. Maybe the restaurant owners should demand proof that their customers are New Yorkers as we don’t need the damn mistakes being made in other states.”

      pgl very soon after, claimed he never said “very careful governor”, even though the comment was literally two inches above in the same thread.

      “he is trying to absolve Trump by attacking certain governors. The reality is that NY did not have enough testing in early April. We do know [sic].”

      Honestly, I really thought pgl was going to momentarily lose control of his bladder muscles with this partly copy/paste comment from “DailyVoice”:
      While New York continues combating COVID-19, Gov. Andrew Cuomo has taken the time to write a book looking back at the state’s experience “climbing the mountain and coming down the other side” while dealing with the pandemic.
      “American Crisis: Leadership Lessons From The COVID-19 Pandemic” is set to be released by Crown Publishing on Tuesday, Oct. 13, three weeks before Election Day.
      The announcement of Cuomo’s book comes a day after he was a prominently featured speaker at the Democratic National Convention, harshly criticizing President Donald Trump, leading to a series of scathing tweets from Trump in response.
      “I’m not entirely sure about the publication date but rumor has it coming out in October – just before the election.”
      set to be released by Crown Publishing on Tuesday, Oct. 13, three weeks before Election Day
      “Duh – that’s where I heard that!”

      This prior pgl comment, the last sentence is a direct quote from pgl. As you read it, remember that over months pgl defended Andrew Cuomo’s policy on nursing homes, but said in another comment, his description of Cuomo as being a “very careful governor” was “snark” after I called pgl out on it. Now, if the gentle reader believes the BS that that was “snark”, look at this comment and tell me pgl’s endless fawning for months over Cuomo, was “snark”:
      “Cuomo hosted a conference call with the governors of the Northeast Region which expressed some smart ideas including the need for testing. Cuomo is basically our national leader given we still have a pack of clowns occupying the White House.”

      Well, as near everyone knows, Cuomo has many interesting headlines recently in our nation’s paper of record, and the man pgl called “Our national leader” on Covid-19 has a new headline this morning in Washington Post:

      1. pgl

        Hey Mr. Reader Impaired. #1 I have turned on Randy Andy. Your reading skills suck.

        #2 – I live in Park Slope so I have known about our open air eating establishments for a long time.

        So maybe one day Rip Van Moses can catch up with the rest of us.

      2. pgl

        the man pgl called “Our national leader” on Covid-19

        I never said that and you know. Gee – you have turned into a blatant liar just like your mentor Bruce Hall. Learn to read and do try a little honesty someday. Damn!

        1. Moses Herzog

          @ pgl
          Just like your co-blogger, I know it’s very painful for you (and embarrassing) to go back and read your own comments, so I will direct the gentle readers of this blog once AGAIN:

          And commenter pgl says: “Cuomo hosted a conference call with the governors of the Northeast Region which expressed some smart ideas including the need for testing. Cuomo is basically our national leader given we still have a pack of clowns occupying the White House.”

          And every time you deny you wrote/typed that, I’ll link it AGAIN ad nauseam. Just to help your memory.

          1. Menzie Chinn Post author

            Moses Herzog: Relative to the ideas coming from the White House at the time, and general administration obstruction,they *were* reasonable ideas of coordinating shutdowns and reopenings. At least I thought so.

          2. Moses Herzog

            @ Menzie
            With much respect~~~referencing Cuomo’s Covid-19 pressers~~You ever listen to a song where someone got the lyrics right but the melody was god-awful?? Yes, I remember watching the Cuomo conferences and being semi-impressed, I “get it”, what you are saying~~~but even back then some of the nursing home numbers were looking very funny, add that in with Cuomo’s Chris Christie-like tossing of staff under the bus on corruption charges~~staff that was very close to him professionally and personally~~it was starting to smell downwind man. Some of the stuff about ventilators at the time, it sounded funny to my ears, like he was trying to spray lilac scent on something he knew was going to come back later on him, it’s hard to put into words, but I had a “sense” there was something bad. My point was, I shouldn’t be trashed by other commenters for making legit criticism of Cuomo, and that criticism shouldn’t “equate to” support of donald trump. pgl has a right to express that, I wouldn’t want pgl’s comments towards me filtered, but don’t expect me not to respond strongly when I’m being called a “MAGA” supporter for calling a spade a spade.

      3. pgl

        “Cuomo is basically our national leader given we still have a pack of clowns occupying the White House.”

        Now if this is the flag Uncle Moses wants to hoist his latest lies on then I guess this drunk little fool wants to dispute my assertion that Trump and Co. were a bunch of clowns. Then again he seems to be defending RonJon of late!

  4. EConned

    For those regularly commenting, this blog recently updated its comment moderation policy. I’m not certain how strictly it is being enforced but the regulars should try harder to adhere to the new ‘policy’ as it’s incredibly difficult to filter through the comments that aren’t “directed to the topic of the original post” and those where commenters are unable to “restrict themselves to civil discussion of the substance of comments”. Cheers!


  5. Paul Mathis

    On Bloomberg TV today David Westin was discussing with a bank CEO the inflationary impact of Biden’s $1.9 T relief package. Westin said that he could remember that in the 1960s and 70s inflation got out of control which he thought could happen again because of Biden’s spending. The bank CEO disagreed.

    While I don’t think Westin is stupid, I don’t understand how he was unaware of the Vietnam war in the 1960s and the oil shocks in the 1970s. The worst deficit to GDP ratio of the 1960s was 1968 at 2.8%. Then in 1969, there was a budget surplus. In the high inflation years 1973-79, deficits averaged 2.2% of GDP which was far lower than deficits in the 1980s when deficits were never less than 2.2% of GDP.

    OTOH, in 2019 the deficit was 4.6% of GDP with CPI inflation at 1.8% and in 2020 the deficit was 14.9% of GDP with CPI inflation at 1.2%.

    The past 60 years of data does not show a correlation, let alone causation, of deficit spending increasing inflation, yet most economists believe in that causality. The bond market does not.

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