Will there be inflation in 2010?

Most economists are now wondering whether or not inflation will reappear as a result of the loose monetary policies adopted by governments across the world in 2010. A lot of very successful investors have also recently reiterated that they think it will. The argument is also compelling (it is even taught in my CFA curriculum) and has been supported by historical events. If enough investors act on this belief, prices will move as a result. And they will move in a way which reinforces the  theory. 

The questions for me are currently a) how pervasive this theory is, b) is or has this translated into price action and c) is this trend likely to continue? This is story has been more or less in the news for the past 4 or 5 years, so I don’t think that anyone would doubt that it is very pervasive. In relation to b), the rise of gold prices and drop in bond prices is evidence that investors have been acting and that this was the story in 2009 as well.

Long dated treasuries

(For longer dated government treasuries the story the selloff occurred throughout 2009 - indicating investor expectation of inflation, according to Seeking Alpha. see also this discussion.)

Short dated treasuries

(Note the renewed selloff in bond prices over December - with IEF penetrating its 50-period SMA on the weekly charts and prompting me to sell my short dated government bonds in  early December ’09).

According to this link however, perhaps the move in short-dated treasury securities was caused by technical traders fishing for a bottom in bond prices (at 0.5% how much lower can bonds go?). But even if you did not believe that this has anything to do with investors being bullish on inflation, worsening technicals have provided another reason to believe that price action began quite a while ago.

So next question is: Will this trend, which has been in place for most of the year, continue?

I don’t have personal views on this but have made the following observations:

Although the weakening dollar has supported the view inflation view, in early December it has reversed suddenly (prompting me to buy $ in early December ’09).

Agricultural commodities – the unspeculated portion of commodities has also not seen much price action.

For inflation to really be a problem, commodities across the board must strengthen (including wheat and natural gas, like in 2006) and the $ must continue to fall (and break through Nov ’08 lows.