In this week’s Indicator Insights post, we talked about consumer expectations for inflation. Specifically, we looked at how interested people were in inflation based on Google Trends search data.
So, for this week’s featured chart, I thought it would be useful to look at what the bond market thinks about inflation.
To gauge something like this, we look at the 10-year breakeven inflation rate. This measure reflects what investors expect inflation to average over the next decade. It’s calculated using the difference between the yield on a traditional 10-year Treasury and a 10-year Treasury Inflation-Protected Security (TIPS). It’s not perfect, but it is one of the market’s best real-time gauges of long-term inflation expectations.
So, what’s the message? Well, a few things really stand out. For one, inflation expectations currently sit around 2.3%. That’s well below the scary 2022 highs, when breakevens briefly surged toward 3%. It also happens to be very close to the Federal Reserve’s long-run inflation target of 2%.
In other words, consumers and markets are telling a similar story when it comes to inflation. Consumers experienced an inflation scare earlier this spring, as reflected by a spike in Google searches for inflation. Around the same time, the bond market also became more concerned, with the 10-year breakeven inflation rate climbing above 2.5%. Since then, however, both have retreated from those highs, suggesting inflation concerns have moderated.
The bottom line? Inflation remains one of the biggest questions facing investors, and this week’s Fed meeting reinforced that the path back to 2% may not be perfectly smooth. Even so, the bond market continues to expect inflation to average just over 2% over the next decade, suggesting investors view inflation as a challenge to manage rather than one that is spiraling out of control.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The 10-Year Breakeven Inflation Rate is a market-based measure of expected average inflation over the next 10 years, calculated as the difference between the yield on a nominal 10-year U.S. Treasury security and a 10-year Treasury Inflation-Protected Security (TIPS)