almost 2 years ago • 1 min
As an investor, it’s useful to keep an eye not just on how fast prices are rising, but on how fast investors think they’ll rise. To do that, you just need to look at the “breakeven inflation rate”: the average inflation rate investors are expecting over the next 10 years, based on the difference between the yields of a 10-year government bond and a 10-year Treasury inflation-protected security (TIPS).
The breakeven rate generally doesn’t stray too far from the Federal Reserve’s 2% long-term inflation target, not least because the Fed is pretty good about lowering interest rates when inflation is too low and raising them when it’s too high. So it was slightly worrying when the breakeven rate touched a record high of 3% last month.
The good news is that it’s since dropped down to a more modest 2.7%. That’s still above the Fed’s 2% target, sure, but the fall shows a broader expectation that the current pace of inflation is going to mellow. And if it does, the Fed will be able to ease up on these rate hikes, taking some of the pressure off stocks and the economic world at large.
Of course, these are ultimately just expectations: there’s still a risk that investors are wrong, and that inflation will prove stickier than expected. But the market is built on expectations, which is why keeping an eye on the breakeven rate (updated here) might help inform what the market will do next – and what you can do first.
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