The bond market seems absolutely convinced that inflation is dead. Yields on short- and intermediate maturity Treasuries are at or very near all-time lows, and long-maturity yields are deep into all-time low levels. The spread between most TIPS and Treasuries (the market's implied inflation rate) has never been lower; outright deflation for the next few years is fully priced in at this point, presumably because of the collapse of energy, commodities, and real estate. Yet the firm "inflation is dead" stance of the bond market stands in sharp contrast to the gold market, where the precious metal trades close to $800/oz., far above its $255 low in 2001 when deflation pressures were clearly evident.
So which market should you trust? Gold has a pretty good track record of forecasting inflation, as I have pointed out before. In contrast, this chart shows that the bond market has not done a very good job of forecasting inflation over the years. The y-axes are offset by 2 percentage points, so that when the two lines are on top of each other then bond yields are 2 points higher than inflation; this is roughly the long-term average spread of yields over inflation. During the inflationary 1970s, the bond market chronically underestimated inflation (and so did the Fed). During the 1980s and 1990s, the bond market chronically overestimated inflation. The action of the past few years looks a lot more like the 70s than anything else. Conclusion: the bond market is likely underestimating inflation risk today. And let's not forget that the Fed is absolutely committed to ensuring that deflation doesn't happen. The Fed has never been so anxious to see inflation.