Is it time for an inflation futures contract?

It has been tried before and failed, but is it time for an inflation futures contract? Transitory inflation may last longer than we think, and transitory does not mean that we get that purchasing power back. Real wealth has been eroded. In a stable world of 2% inflation targeting, a futures contract may not serve an economic purpose but now may be different.

Bond futures have a strong expected inflation component, but there may be a need for an exchange cleared product. There is an active TIPS markets albeit no TIPS futures. However, a hedge or method of trading CPI over the short run is not direct or exactly easy. Of course, we have a strong inflation swaps market. An inflation swap can be cleared through an exchange so some of the futures benefit can be received without a futures contract. However, investors who want a direct inflation hedge may like more choices. 

Previously, I was an economist for a futures exchange working on contract development and I will tell you it is not easy to launch a new futures contract. Most will be failures. A contract success will be based on a strong set of active buyers and sellers as well as a high level of volatility and uncertainty that must be hedged. 

Many will say that you will be able to get close through buying a commodity basket, gold, or oil futures, but any close look will show that the variation between inflation and commodities can be volatile and the correlation has declined as the US economy has changed to be more service focused. For businesses and investors, an inflation futures market could be useful and the cost of managing a contract in an electronic world is substantially less. This is worth a more serious discussion.