Eno Deb wrote: ↑Thu Jul 16, 2020 6:10 pm
Kevin M wrote: ↑Thu Jul 16, 2020 3:27 pm
Discussion about

why the 1-month CPI change was relatively large in magnitude, whether up in July or down in April, is a red herring in the context of the misunderstanding that I have been trying to correct, which is about the

current real return of a high-yield savings account (which we have no way of knowing).

I understand the math, but an annualized inflation rate calculated from a single extraordinary month cannot be used to make a meaningful argument about the

expected real return of a CD over the course of its term. I can't predict the future, but it is extremely unlikely that we'll see a 7% annual inflation rate during the term of currently offered short- to medium-term CDs.

Please quote wherever I said or even implied that any one-month inflation rate has anything to do with the expected real return of a CD over any term. I don't think you will be able to, since I never did so. I don't disagree with what you're saying about expected real return.

You seem to be ignoring the part where I also did not use the

-9% annualized monthly inflation of April to extrapolate that to any future period, nor to use it to say anything about

expected real returns.

Again, you are missing the context; I am agreeing with what you're saying about not being able to predict the future. Since we can't predict future inflation, we won't know the inflation for the current month until the CPI numbers are released next month. Therefore we don't know what our

current real return is on a nominal investment, whether it's a CD or a savings account.

For the umpteenth time, I'm simply saying that inflation over the previous 12 months does not have anything to do with the real return we

currently are earning (which we can't know), but only to the real return we earned over that (past) 12-month period. The erroneous view that we can use year over year inflation to calculate the real return we currently are earning has been stated at least twice, so I'm just trying to help people understand that that is a mistake.

By contrast, the monthly inflation in July (or May or April)

is relevant to the real return we earned

in that particular month. So I'm only quoting monthly inflation rates to emphasize the error of using year over year inflation to calculate our

current real return.

In terms of expected real return, I'd lean toward using the breakeven inflation rate for the term of interest as expected inflation for that term. Others prefer survey data, since there are liquidity and unexpected inflation premiums embedded in the breakeven inflation rate, but since neither of these can be observed, and they affect the real yield in the opposite direction, I figure the breakeven inflation rate is good enough. For example, the current 5-year BEI rate is 1.30%, and the 10-year is 1.41% (source:

https://fred.stlouisfed.org/graph/?g=t3fv).

Kevin