I made my first retirement plan after my freshman year at college. Back at home, with one year of college under my belt, my good friend John and I were discussing our plans for the future. I don’t recall the entire conversation, but I do remember saying “my goal is to accumulate a million dollars, and then cash out and live off the interest.” I further explained that this plan would generate $50,000 a year since 5% interest seemed reasonable.

The year was 1974. I came from a blue-collar neighborhood where typical incomes were in the $10,000 to $15,000 range. Anyone making $20,000 was well above-average. I believed my plan would overcome inflation, and it was based on an extremely conservative income assumption – living off the interest while never touching the principal.

This chart (click to enlarge) is not meant to be scientific, it is meant to be suggestive of what the TIPS market may be implying about the outlook for real growth in the U.S.

The blue line represents the rolling, 2-year annualized rate of real GDP growth. I've used a rolling 2-year figure to smooth out the ups and downs in yearly data, and I think it's reasonable to assume that the market's outlook for the future tends to be influenced by the experience of the recent past. The red line is simply the yield on 5-year TIPS.

Bloomberg is out this morning making the case for deflation. They note that the primary drivers that have kept inflation low in the past year are still quite strong: a very weak job market, weak spending, and depressed consumer confidence. In fact, just this morning the Conference Board reported consumer confidence falling sharply from last month. The survey showed consumers extremely bearish in their expecations for future income, which really should be turning your deflation lightbulbs on. Bloomberg also mentiond the popular "fears" behind inflation forecasts, a ballooning FED balance sheet and rising commodity prices, may be overblown.

Exibit 1: Trimmed Mean Inflation Index