This week’s featured indicator is kind of like a pressure gauge. But instead of measuring gas or liquid, it tracks financial—or more specifically, inflationary—pressure in the economy.
How does it work? Think of it as a tug-of-war between economic growth and interest rates. When nominal GDP is growing well ahead of long-term interest rates, it creates upward pressure that often pushes prices higher—in other words, inflation.
But when interest rates exceed nominal GDP growth, the cost of capital rises. Debt becomes harder to manage, spending slows, and pressure is relieved. That often results in lower inflation.
You can see this dynamic on the chart. The top clip shows the year-over-year change in the Consumer Price Index, represented by the green line. The middle clip plots year-over-year nominal GDP growth (orange line) alongside long-term Treasury yields (black dashed line). The bottom clip shows the difference between the two—nominal GDP minus bond yields—using the blue line.
Historically, this indicator has operated within three general zones. When GDP growth outpaces yields by more than three percentage points, inflation tends to rise. When the spread drops below -1.7 percentage points, inflation tends to fall. In between—where we are now—the signal is neutral. Not too hot, not too cold.
That’s an encouraging sign. After the high-growth, low-rate environment of the early 2020s, which contributed to surging inflation, the system now appears more balanced. It also suggests we’ve avoided the steeply negative readings that typically show up during recessions.
For the Fed, this backdrop supports a more measured approach. With growth and yields closely aligned, there’s little urgency to shift policy aggressively in either direction. Inflation isn’t accelerating, but it’s not disappearing either.
All in all, inflation pressures appear fairly balanced—and that supports a more constructive outlook for equities.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.