I’ve got inflation on my mind these days. Who doesn’t? The U.S. 10-year treasury yield is up nearly 3-fold in the past year, stoked by fears of inflation. Commodities too are rocketing higher for similar reasons (in part). However, I’m not convinced these trends will hold. To me, the deck looks stacked against inflation. Its misinterpretation may present trading opportunities.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world (emphasis added). Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement (emphasis added). Inflation has risen, largely reflecting transitory factors.

Federal Reserve’s FOMC statement, April 28, 2021

It’s rare that I agree with Federal Reserve (Fed) officials. However, I fall firmly in the “transitory” camp when it comes to today’s inflation. It’s not that I think the Fed has been a good steward of the U.S. dollar’s value. Rather, it’s that inflation has little to do with monetary policy anymore. It’s the way in which we define inflation that makes me a secular deflationist. You see, I’m an optimist. I simply expect human ingenuity to prevail.

The U.S. 10-year treasury rate (blue) has nearly tripled from its all-time lows and commodities (purple) are rocketing higher as CPI (red) has increased.

Inflation’s meaning has stealthily changed

We take inflation’s meaning for granted today. It’s a foundational concept for valuing bonds that rolls off the tongues of laymen as easily as experts. There are volumes of books chronicling it, reams of academic literature analyzing it, and scores of metrics to measure it. Inflation is one of the most studied and commonplace financial concepts in the culture.