Due in part to the expected economic impacts of the coronavirus pandemic, but also to various longer-term secular trends (aging populations, low GDP growth rates, etc.), the expectations for inflation in the developed world over the next ten years have collapsed to historically low levels.
For context, the first chart below shows the lowest inflation rate in any 10-year period for each of 7 developed nations since 1950. The average lowest rate during the past 70 years was 1.20%.
Data source: Jorda-Schularick-Taylor database.
The second chart below shows the expected inflation rates in these same countries for the coming 10 years, based on their current breakeven inflation rates (nominal yield minus real yield on 10-year bonds). The average expected inflation rate for the decade ahead is just below 0.50%.
At these low rates of expected inflation, it's likely that the Fed and other central banks around the world will not come close to meeting their 2% inflation targets in the coming decade. It's also increasingly possible that long-term inflation expectations in the developed world might permanently
reset lower, into the 0.5%-1.0% range.
Implications for investors in the years ahead?