Category Archives: Inflation

Summer reading: Probabilities of tail-events

What is the likelihood that we will see high inflation? What is the likelihood that we will see deflation? What is the likelihood that the stock market will crash? And what is the likelihood that it will continue rising? How likely is it that real estate prices will fall, and how likely is it that they will rise? And what about the exchange rate? Find the answers to these questions in this summer story.

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Yields and inflation expectations

During the last couple of weeks, yields have been rising and stock markets falling. Standard market turbulence is not interesting for this blog – stocks go up and down, most of the time up, and yields fluctuate – but intriguing (and expected) patterns characterize recent events.

Everybody seems to agree what is going on markets these weeks: Vaccines are successful and being rolled out, so economies will open up soon, and Biden will get his stimulus package to the tune of USD1.9tn. These two things (an already strong economy when opening up and on top of that a large stimulus package) will lead to very strong growth during the second half of 2021. Inflation will rise and the Fed will have to tighten monetary policy. The expected rise in inflation and the policy rate leads to increases in yields today. This hurts stocks. These US developments spill over to other countries.

This story largely makes sense. Looking at the data, however, interesting outstanding issues remain.

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