Ep. 105: Inflation as Foreign Exchange, or How People Screwed Up Housing Forecasts

2024-04-03

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Okay, buckle up because the Inflation Guy here is going to cover some big-time concepts. Wayyyy back in 2003, some guys named Jarrow and Yildirim explained how inflation acts just like foreign exchange, except not foreign and not on an exchange. No, no, stay with me here. Turns out they were right, and a lot of what is happening today - and the mistakes in interpretation that are being made - can be understood if you understand that the 'inflation FX market' has just changed in important ways. This is an important...

Okay, buckle up because the Inflation Guy here is going to cover some big-time concepts. Wayyyy back in 2003, some guys named Jarrow and Yildirim explained how inflation acts just like foreign exchange, except not foreign and not on an exchange. No, no, stay with me here. Turns out they were right, and a lot of what is happening today - and the mistakes in interpretation that are being made - can be understood if you understand that the 'inflation FX market' has just changed in important ways. This is an important episode!

NOTES

Jarrow R, Yildirim Y (2003) Pricing treasury inflation protected securities and related derivatives using an HJM model. Journal of Financial and Quantitative Analysis 38(2):337–359. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=585828

Unidad de Fomento (Wikipedia entry): https://en.wikipedia.org/wiki/Unidad_de_Fomento

Chart: Nominal and inflation-adjusted Case-Shiller 10-City index, normalized to end of 2019

Chart: Nominal and Real S&P 500 Earnings, normalized to end of 2019

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