Remain Short Inflation Protection
http://www.bcaresearch.com/public/story.asp?pre=PRE-20100921.GIF
The U.S. annual core inflation rate has been stuck at 0.9% since April, but should soon break down.
Given that the housing market remains a mess, there is a high chance of a temporary bout of outright deflation in the core CPI measure in 2011. The economy is likely to struggle to attain its potential rate of growth in the near term, which means that the output gap will remain wide. U.S. dollar weakness may mitigate the deflationary pressures, but not by much. Retailers have not been able to pass along higher import prices to consumers for years.
Bottom line: The downward trend in core inflation, high unemployment and weak money growth give the Fed plenty of reasons to expand its balance sheet further. For investors, the recent backup in long-term CPI swap rates provides a good opportunity to position for lower inflation expectations.
