5-Year Inflation Outlook Jumps to Highest Since 2006

The bond market is beginning to take into account the seriousness of impending consumer price inflation, as expectations soar to the highest in more than 15 years.

The five-year breakeven rate, which measures the gap in yields between inflation-related debt and non-inflation securities, soared by 3.4 basis points to above 2.7%, the highest since 2006. In the meantime, nominal rates remained relatively unchanged, with the five-year yield falling by one basis point to around 0.76%.

The latest jump in breakeven rates follows last Friday’s US jobs report, which was significantly weaker than expected. The nonfarm payrolls report induced speculation in the bond market that the current labour market situation could spur wage inflation. In addition, breakeven rates also got a boost following a price rally for oil products, after a major US pipeline was forced to shut down. This further adds fuel to the uptick in long-run inflation expectations, which are being propelled by optimistic prospects of strong economic growth, along with upcoming government infrastructure spending plans.

Indeed, an increasing number of Americans anticipate a jump in price pressures over the next five years as the US economy continues to reopen in wake of the Covid-19 crisis. According to a new report published by the Federal Reserve Bank of New York, consumers are expecting the inflation rate to rise to 3.4% one year from now— the highest since September 2013— and sit at 3.1% by 2026.

Information for this briefing was found via the Federal Reserve Bank of New York and the Federal Reserve Bank of St. Louis. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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