Has the inflation risk premium fallen? Is it now negative?, Accessible Data
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Figure 1: TIPS-based measures of inflation compensation
Source: Federal Reserve Board staff estimates
There are 3 lines. One line shows 10-year inflation compensation, another shows 5-year 5 years ahead inflation compensation, and another shows the constant 2% FOMC target. The 10-year inflation compensation moves between 2 and 5 percent until 2009, where it plummets to zero before recovering quickly within the year. Afterwards the line oscillates between 1.8 and 2.5 percent, and beginning in 2015 it moves downward. The 5-year 5 years ahead inflation compensation line moves mostly in parallel to the 10-year line, though it is slightly higher, by about 50 basis points on average. The 5-year 5 years ahead line does not plummet in 2009, however, though it does show the more recent decline. At the end of the sample, (Jan 2016), both inflation compensation lines are about 50 basis points below the 2 percent target line.
Figure 2: Estimated correlations between 10-year forward consumption growth and long-run inflation
The y axis is correlation, and the x axis shows dates, from 1975 to 2015. There are 3 lines, (1) 10 year ahead inflation, (2) 5-year 5 years ahead inflation, and (3) a constant line at zero. Lines (1) and (2) move together closely. They both are in the negative range of the plot, around -0.50 from 1975 to 2009, though the lines on occasion they approach zero (between 1992 and 1997, and between 2002 and 2004). In 2009, both lines pop up to near 1.0, flipping signs, and have remained near 0.25 since then.
Figure 3. Beta of one-year ahead positions in inflation compensation with respect to the S&P500 index
The y axis shows beta and the x axis shows dates from 2002 to 2016. There are 4 lines: (1) beta for 10-year inflation compensation, (2) beta for 5-year 5 years ahead inflation compensation, (3) S&P 500 VIX, and (4) a constant line at 0. The two beta lines move very closely. They hover near zero from 2002 to 2009, but then drop sharply to -0.2 in 2009, and remain negative for the remainder of the sample. Near the end of the sample, they both move downward simultaneously, though the 5-year 5 years ahead beta shifts more sharply. The VIX line shows rare spikes, with a spike in 2009, which comes at exactly the same time as the change in signs for the beta lines.