Market-Based Measures of US Inflation Expectations Are Hitting Record Highs

Market-Based Measures of US Inflation Expectations Are Hitting Record Highs
Andrew Rummer

over 2 years ago1 min

US inflation expectations derived from trading in the bond market are hitting record levels as ongoing supply-chain disruption pushes up prices in the world’s largest economy. 

As the chart above shows, the so-called five-year breakeven rate briefly hit 3% last week, the highest rate in its two-decade history. This rate is derived from the relative amounts investors are willing to pay for regular US government bonds and their inflation-protected cousins. It effectively means bond investors expect US inflation to average 3% over the next 5 years. 

At the same time, the 10-year US breakeven rate has climbed to 2.6%, meaning bond investors expect an average inflation rate of 2.6% over the coming decade. Both the five-year and 10-year rates are well above the Federal Reserve’s 2% inflation target.

10-year breakeven inflation

Expect a lot of attention of these key US breakeven rates as investors attempt to figure out whether the post-pandemic economy will return the deflationary trends of the past 40 years – with aging populations and tech-fueled declines in the cost of goods – or switch to a new, inflationary regime.

Two major public figures, Cathie Wood of Ark Investment Management and Twitter’s Jack Dorsey, clashed over this very topic on social media over the weekend. While Dorsey warned that, “hyperinflation is going to change everything,” Wood countered that, “sources of deflation will overcome the supply chain-induced inflation.”

For now, we’ll have to wait and see who proves to be correct.

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