TIP vs. AGG: Sideways-to-lower inflation expectations

The Consumer Price Index (CPI) rose to 2.7% year-over-year in November, which was well below the consensus of 3.1% heading into the print and a softer than the +3.0% reading in September.

Prior to this morning's CPI numbers, the iShares TIPS Bond ETF (TIP) relative to the iShares Core U.S. Aggregate Bond ETF (AGG) suggested sideways-to-lower inflation expectations. The recent breakdown in the TIP/AGG ratio suggests that expectations for inflation should drop back down to the lower end of its 2022-2025 trading range.

Key notes

• The iShares TIPS Bond ETF (TIP) seeks to track the investment results of an index composed of inflation-protected U.S. Treasury bonds.

• The iShares Core U.S. Aggregate Bond ETF (AGG) seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.

• An increasing TIP vs. AGG ratio: TIP is leading AGG to suggest rising inflation expectations.

• A decreasing TIP vs. AGG ratio: TIP is lagging AGG to suggest falling inflation expectations.

• A sideways TIP vs. AGG ratio: Neither TIP nor AGG is leading or lagging to suggest contained inflation expectations.

Chart 1: iShares TIPS Bond ETF (TIP) relative to iShares Core U.S. Aggregate Bond ETF (AGG)