We don't claim that our sticky-price Phillips curve produces a demonstrably better forecast of the CPI-given its simplicity, we would be very surprised if it did. But we nevertheless wanted to see if some prices in the CPI are more responsive to the business cycle, and if some are more forward looking. Our experiments with this data suggest that the answer to both questions is yes.

We found that the flexible-price series tends to bounce violently from month to month, presumably as it responds to changing market conditions, including the degree of economic slack. On the other hand, sticky prices are, well, sticky, slow to adjust to economic conditions. Importantly, the sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to discern where inflation is heading.

Where is inflation heading? Well, the last FOMC statement held that the view that "inflation is likely to be subdued for some time." We certainly don't have reason to question that outlook. Indeed, while the recent trend in the core flexible CPI has risen some recently-it's up 3.3 percent over the past 12 months (ending in March)-the trend in the core sticky-price CPI continues to decline. Even excluding shelter, the 12-month growth rate in the core sticky CPI has fallen 1.1 percentage points since December 2008, down to 1.8 percent in March. So on the basis of these cuts of the CPI, we think "subdued for some time" sums up the price trends nicely.

Eoin Treacy's view This article by Michael F. Bryan and Brent Meyer for the Cleveland Fed may be of interest to subscribers. Here is a section:

We don't claim that our sticky-price Phillips curve produces a demonstrably better forecast of the CPI-given its simplicity, we would be very surprised if it did. But we nevertheless wanted to see if some prices in the CPI are more responsive to the business cycle, and if some are more forward looking. Our experiments with this data suggest that the answer to both questions is yes.

We found that the flexible-price series tends to bounce violently from month to month, presumably as it responds to changing market conditions, including the degree of economic slack. On the other hand, sticky prices are, well, sticky, slow to adjust to economic conditions. Importantly, the sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to discern where inflation is heading.

Where is inflation heading? Well, the last FOMC statement held that the view that "inflation is likely to be subdued for some time." We certainly don't have reason to question that outlook. Indeed, while the recent trend in the core flexible CPI has risen some recently-it's up 3.3 percent over the past 12 months (ending in March)-the trend in the core sticky-price CPI continues to decline. Even excluding shelter, the 12-month growth rate in the core sticky CPI has fallen 1.1 percentage points since December 2008, down to 1.8 percent in March. So on the basis of these cuts of the CPI, we think "subdued for some time" sums up the price trends nicely.

My view - Sentiment toward the Treasury market has swung from one extreme to another in a relatively short period of time. It was not so long ago that some pundits were encouraging the whole world to short US Treasuries. Today with prices for the 30yr in the region 125, investors are more occupied with thoughts of Eurozone debt issues and where to find a safe haven. In between these two extremes fundamentals haven't changed much but perceptions have moved a lot. An examination of the price charts may be instructive at this juncture.

US 30yr Treasuries broke upwards last week and while overextended in the short-term a downward dynamic would be required to check momentum. The 10yr has a similar pattern. The 2yr is testing the upper side of the 15-month range near 109 and needs to sustain a move above that level to reassert the medium-term uptrend. US 10yr yields are testing the lower side of their yearlong range and an upward dynamic would be required to indicate renewed support in this area. 2yr yields are also at an interesting level, testing the December low between 0.6% and 0.7%.

Eurobunds broke above 125 three weeks ago and are now into their seventh consecutive week to the upside. The short-term uptrend is overextended but a downward dynamic would be required to check momentum beyond a brief pause. The German 10yr encountered resistance in the region of 3% from May 10th and a rally above that level, sustained for more than a day or two is needed to indicate a loss of demand for these bonds.

UK Gilts have rallied sharply to test previous resistance in the region of 120. A downward dynamic, similar to those posted on other occasions when this level was tested, would be required to question scope for a successful upward break. UK 10yr yields have dropped back sharply to 3.5% and are somewhat overextended in the short term. An upward dynamic similar to those posted on other tests of this area would be required to indicate a loss of demand.

The Swiss 10yr broke upwards to new a high in December, consolidated above 135 and reasserted the medium-term uptrend three weeks ago. A sustained move below 140 would be required to question the consistency of the advance. The Swiss 10yr yield is currently accelerating lower at an unsustainable rate, but an upward dynamic, sustained for more than a week or two, is needed to indicate supply is regaining the upper hand.

The Japanese 10yr has sustained a progression of major reaction lows since June 2007 and this sequence would need to be taken out, with a sustained move below 138, to question scope for further higher to lateral ranging.

The Australian 10yr remains rangebound between 94 and 95 and is currently rallying. A sustained move above 94.8 would be needed to indicate a return to demand dominance.

The Canadian 10yr failed to sustain the downward break last month and has now rallied to test the medium-term progression of lower rally highs. A sustained move back below 119.50 would be required to confirm resistance in the current area.

All of the above charts suggest that sovereign bonds have already had a big move and many are now testing areas of previous yield support. Sentiment towards the sector remains bullish as Euro sovereign concerns and deflationary pressures continue to exert an influence on investor behaviour. However, I believe it would be a mistake to give bearish sentiment precedence over the chart action, which suggests that the current bond rally is getting long in the tooth. On their respective yield charts, upward dynamics, particularly if they occur across a range of markets within a short time, would indicate supply is returning to dominance.