Interest Rates and Inflation

July 27, 2009

Figures in the table below are expressed in basis points expect for the latest ten-year bond yields and the latest on-year CPI inflation rates.  Entries in the fourth, fifth, sixth and seventh rows are the respective changes of latest bond yield quotes from their averages so far this month, their average values in the first half of this year, their 2007-8 averages, and their 2006 averages.  The first row are the 10-year yields at this writing.  Data in the second row show latest 12-month rates of CPI inflation, and figures in the third row are the difference in basis points of current CPI inflation from a year earlier.  The final row of data indicate how far central bank deposit rates have dropped compared to a year ago.  Bund yields are used to represent the euro area.

  U.S. Euro area Britain Japan
10-year, % 3.71% 3.49% 3.97% 1.40%
CPI, % -1.4% -0.1% +1.8% -1.1%
Now vs July, bp +19 +12 +18 +6
Now Vs 1H09, bp +70 +24 +48 +1
Now V 2007-8, bp -43 -63 -78 -18
Now Vs 2006, bp -108 -27 -54 -34
CPI on-year chg -640 bp -320 -200 -240
CB rate chg, bp -188 bp -300 -450 -40


The matrix above documents several findings:

  1. Long-term interest rates have trended higher in 2009, but levels remain below their mean levels in 2007-8 and 2006.
  2. Long-term rates are further below their 2006 levels in the U.S. than the other selected economies.
  3. Consumer price inflation and central bank rates are below year-ago levels in all instances and are negative in three of the instances.
  4. The United States experienced the sharpest deceleration of inflation and the greatest decline of long-term rates relative to 2006 levels.
  5. The Bank of Japan eased less substantially during the past year than the Fed, Bank of England, or ECB.  The yen is stronger than in July 2008.
  6. Only in Britain did the central bank rate fall more sharply over the past year than CPI inflation.  Sterling is weaker than a year ago.
  7. Japanese long-term interest rates are closer to their 2007-8 average level than long-term rates in the other three economies.
  8. But bund yields show a smaller drop from their 2006 mean than do JGB yields.  EUR/USD was stronger a year ago than now.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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