There are quite a few ways to look at inflation and the general inflation expectation of various markets. Most people think of CPI or Core CPI as “inflation”, or they look at interest rates or the price of gold. Perhaps more important than the official statistics is what inflation expectations are…

There’s an easy way to see what the market expectations currently are for inflation — look at the relative performance of inflation adjusted bonds versus normal bonds. The easiest way to look at this is with a chart of TLT:TIP.

Analyzing TLT vs. TIP it is a bit tricky since the important factor is the yield rather than the price (and the price is inverted to the yield). So, as inflation expectations are increasing the yield for TIP will rise and the price will fall. If the yield of TIP is increasing faster relative to the yield of TLT (or as the price of TIP falls faster relative to the price of TLT) then we see inflation expectations increasing.

So, to keep things sane and easier to mentally process, I put the ratio in terms of TLT:TIP. That way, as the ratio is increasing that is the equivalent of inflation expectations increasing.

As you can clearly see today the expectation for inflation has been rising over the last 4 months. This is in line with the recent uptick in CPI…