It’s worth revisiting the inflation vs. deflation argument as things have been changing quite a bit over the last few months. Below is the chart of TIP:TLT that is my measure of inflation expectations. Going into the end of 2008, we saw a rather significant deflation scare. Anecdotal evidence abounds for prices and wages falling, and indeed it may be more than just a scare.

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You might notice that the ratio has rebounded strongly in 2009, indicating that the investing masses may have a relative preference for TIPs over normal bonds. Despite the message the market is sending (as observed by the ratio), I haven’t heard much rumbling about inflation, except from the contrarian camp.

The real question is whether we’re returning to a “normal” expectation of inflation, or if people are just not as convinced about deflation as they were during the crash of 08.

Obviously time will tell, but if the ratio were to reverse strongly, that would be a good indication of another deflation scare. Likewise, it will be interesting to see where the new trading range is as the market figures out the “new normal”.