Inflation has become a critical global economic challenge. In the United States, inflation peaked at 9.1% in June 2022, the highest level in four decades, before falling to 3.3% in May 2024 (Azam & Khan, 2022). This volatility significantly disrupts macroeconomic stability and reduces purchasing power, particularly affecting long-term investment assets such as 10-year US Treasury Bonds. This extreme volatility increases uncertainty in global financial markets while underscoring the urgency of a comprehensive understanding of inflation transmission mechanisms. The Consumer Price Index (CPI) is universally recognized as the primary indicator of inflation. As a measure of changes in the prices of essential commodities (housing, transportation, food), this index shows the main contributors to post-pandemic inflation. Inflation measured by the Consumer Price Index (CPI) is a critical indicator in the government bond market that directly affects the yields of long-term securities such as the 10-year US Treasury Bond.
Based on an explanatory quantitative study that aims to examine the complex dynamics of this relationship using the nonparametric least squares spline method using monthly CPI data from FRED and 10-year US Treasury bond yield data from Investing.com for the period 2013-2025, where this method divides the data into simple polynomial segments that are smoothly connected at transition points (knots), thus allowing for modeling nonlinear patterns without assuming the initial curve shape, the results obtained are that a first-degree polynomial spline model (piecewise linear) with three knots successfully represents the bond yield response to inflation shocks with 𝑅2 = 86.48%. Model segmentation identified four regimes: (1) Post-crisis recovery phase, with a negative relationship driven by Fed monetary stimulus suppressing yields despite initial inflation emergence; (2) Policy normalization phase, with a positive relationship aligned with monetary tightening in response to moderate inflation; (3) During the COVID-19 pandemic, a negative relationship due to a surge in demand for safe-haven bonds despite rising inflation; (4) Post-pandemic, the relationship turned positive again following the Fed’s aggressive monetary tightening in response to high global inflation.
These findings highlight the urgency of regime-based monitoring for investors and policymakers, while contributing concretely to SDG 8 (decent work and economic growth) through the facilitation of appropriate interest rate policies for sustainable macroeconomic stability, and supporting SDG 9 (industry, innovation, and infrastructure) through the identification of inflation patterns that strengthen shock-resistant infrastructure investment planning and financial innovation during turbulent economic transitions.
Author: Dita Amelia
The article can be accessed here: https://journal.ummat.ac.id/index.php/jtam/article/view/33020
