In the US, the five-year breakeven inflation rate - the gap between conventional and inflation-proofed Treasury yields - has fallen to 1.2 per cent, close to its lowest level since May 2008. This implies that markets expect the Fed to consistently fail to meet its target of 2 per cent inflation over the next five years. And they don't expect it to do much better in the following five either: the breakeven inflation rate for then is only around 1.8 per cent.
Much the same is true in the UK. The 10-year breakeven inflation rate is now 2.6 percentage points. Given that this refers to RPI inflation, which is usually well above CPI inflation, it too implies that markets expect the Bank to miss its inflation target.
To put this another way, markets expect monetary policy to be too tight.
This matters, because there's a good reason why central banks target a positive inflation rate. Quite simply, if inflation is around zero then interest rates will be low, which means they won't be able to fall sufficiently to cushion the economy from any shock to demand. This means economies are more vulnerable to recession.
History tells us this. Between 1831 and 1914 the UK had price stability: inflation averaged zero in this time. But the volatility of real GDP growth was higher then than it has been in the inflationary post-war era with the result that recessions were more common. In the 83 years from 1831 to 1914 GDP fell in 16 of them: that's 19 per cent. But in the 67 inflationary years from 1948 to 2014 there were only nine years of recession - 13 per cent.
This greater risk of recession means there's more risk of falling earnings and increasing risk aversion and hence more danger for equities. To reflect these greater risks, share prices should be lower. Which of course they are. It's no accident that in recent years there has been a close correlation between the five-year US breakeven inflation rate and the MSCI world equity index: of 0.49 in monthly data since January 2007.
Granted, some of this correlation is because the same things that depress inflation expectations also depress share prices, such as falling global demand. But it also highlights the fact that near-zero inflation poses risks to shares. To this extent, central bankers' expected failure to control inflation is costing shareholders a fortune.
We can, roughly, quantify this. Based on the post-2006 relationship between the US breakeven inflation rate and MSCI world index, if breakeven inflation were at 2 per cent then share prices would be 10 per cent higher than they are. This would be a rise of $3.2 trillion. This is how much equity investors are losing because bond markets don't trust the Fed.
However, this distrust is unnecessary. Even in a world of weak growth and deflationary risks central bankers still have the tools to push up inflation. They could do yet more QE: although the efficacy of conventional forms of this is weaker when government bond yields are low, they could beef it up by buying riskier assets such as corporate bonds or equities. They could cut interest rates to below zero - as the Bank of England's chief economist Andy Haldane recently suggested. Or they could simply write cheques to all households, as Oxford University's Simon Wren Lewis and M&G's Eric Lonergan have proposed. And let's not forget that monetary policy isn't the only option: there's also fiscal policy.
In this sense, low breakeven inflation rates mean that bond markets are accusing policy-makers not just of a lack of competence, but a lack of will. That’s a serious allegation.
But is it true? Maybe bond markets are wrongly under-estimating the will and ability of central banks. Or maybe they are overreacting to bad news and so over-estimating deflationary pressures. If so, breakeven rates and share prices should eventually rise as the market wises up. It's not just equity investors who should hope this is the case: central bankers should, too.
