Swaps Predict Inflation When All Else Comes Up Short
Derivatives tied to the bond market have proved prescient in determining the path of consumer prices in contrast to the apocalyptic scenarios pushed by economists.
Inflation is slowing.
Photographer: Mario Tama/Getty Images
A year ago this week, the US government told us that inflation as measured by the Consumer Price Index soared to 9.06% in June 2022 from a year earlier, the highest reading since 1981. The report sparked a crescendo of commentary around the idea that inflation was so hot, nothing less than a recession that throws millions of Americans out of a job would get it under control. Comparisons with the runaway wage-price spiral of the 1970s were ubiquitous.
It all sounded plausible if not for an inconvenient fact: one small part of the $30 trillion market for US government securities -- the daily reference of global investor preferences -- wasn't having any of it. Here, the incessant chatter that the Federal Reserve was “behind the curve” fell on deaf ears. Today, there isn't any doubt about who was ahead of the crowd. This week the government is forecast to say the inflation rate fell to 3% in June, according to data compiled by Bloomberg, something the bond market predicted a year ago.