As we know, the Fed has announced an inflation ceiling of 2% AND that it will keep short term rates close to zero at least until the later part of 2014.
I believe these two commitments are contradictory if we manage to achieve a decent economic recovery, and it is looking more and more like we are finally getting exactly that.
Here is a chart of the implied 2 year ahead level of inflation expectations derived using yields on inflation protected securities (TIPS):
The red line is the Fed's 2% ceiling.
People, can I get a YIKES?
The source for this chart is here, the hat tip goes to LeBron, and the source also argues that markets are strongly pricing in a Fed rate increase in 2013.
At this point, unless the recovery falters, I don't think the Fed will keep EITHER of its two promises