The U.S. market is sending a worrisome signal on inflation
Investors are downgrading their expectations for inflation over the
next half decade, sending a concerning signal about the pace of the U.S.
economic recovery.
Market-implied inflation forecasts took a nose-dive after Federal Reserve policy members suggested a more aggressive timeline for hiking key short-term interest rates last Wednesday.
One of the more closely-watched gauges of consumer prices fell for the first time in 16 months,
showing that the specter of inflation growth emerging during the
second-quarter didn’t quite manifest. The annual rate came in at 1.7%. A
look at breakeven rates tells us a lot about where the markets think
inflation is headed. The So-called breakeven rates are the difference
between 5-year Treasury note
5_YEAR, +0.91%
yields and 5-year Treasury
inflation-protected security yields. The differential, representing the
rate of inflation necessary for TIPS to outperform their nominal
counterparts, acts as a rough gauge of where inflation might be headed
over the coming five years.
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