Inflation views appear to have diverged recently, with consumers in a preliminary survey expecting a rise in the cost of living while a markets-based measure...
Inflation views appear to have diverged recently, with consumers in a preliminary survey expecting a rise in the cost of living while a markets-based measure is pointing to a decline.
The five-year breakeven inflation rate in the U.S. closed at a 28-month low of 2.11% on Friday, said Deutsche Bank’s Jim Reid in an emailed research note Monday. That suggests that markets expect inflation to be around the Federal Reserve’s 2% target on average over the next five years “with no after effects from the last 2-3 years.”
“For now though, should we take comfort from the market pricing in well behaved inflation or worry about what consumers are saying?” said Reid. The chart below highlights the divergence between consumers’ long-term U.S. inflation expectations and what the market is anticipating based on the five-year breakeven rate.
Last year the Fed began aggressively hiking interest rates in an effort to tame soaring inflation. The cost of living in the U.S., as measured by the consumer-price index, increased at a rate running as high as 9.1% in June 2022. That was the highest in about four decades. As for the University of Michigan’s preliminary reading of consumers’ inflation expectations, “this series has a habit of being downgraded in the final reading so we need to wait for later in the month to see if that pattern returns,” said Reid.
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