Investors usually keep an eye on the Consumer Price Index (CPI) regarding inflation and interest rates, but another important indicator is telling that inflation may remain above 2% for the next few years. This indicator is the ‘five-year breakeven inflation rate’, which tells how much inflation the market expects on average in the coming five years.
Signs of breakeven inflation rate
Recently this rate has remained around 2.6%, which shows that inflation may remain above the Federal Reserve’s target of 2%. Experts analyzing this indicator believe that although the inflation rate will not reach the heights of 2021-2023, it would also be wrong to expect that it will come below 2% soon.
Tim Magnusson, chief investment officer at Gardena Capital Partners, says current economic conditions indicate that inflation may remain relatively high for a few years. Recent consumer expectations data released by the University of Michigan also confirm this assumption.
CPI report and market reactions
The CPI report to be released for January is expected to show that the annual headline inflation rate will be slightly lower than in December. According to economists’ estimates, this rate may be 2.8% in January and core inflation rate may be 3.1%. However, looking at the market movement, it is clear that investors are cautious about the possibility of inflation persisting.
Changes in bond market and yield
This new outlook on inflation is also causing turmoil in the bond market. Treasury yields have risen to 4.54%, indicating that investors are concerned about long-term high inflation. According to Mark Heppenstall, Chief Investment Officer of Penn Mutual Asset Management, the 10-year bond yield may stabilize around 4.5%. He also said that controlling inflation in the near future may be challenging due to administrative policies and inflation mindset among consumers.
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Federal Reserve policy and possible decisions
Federal Reserve Chairman Jerome Powell has indicated that there will be no hurry to cut interest rates. The central bank is currently analyzing the data and will take a major decision only when it is confident that inflation is under control permanently.
Long-term inflation scenario
CPI data gives us information about current inflation, but market-based indicators such as the five-year breakeven inflation rate provide a predictive outlook. According to this indicator, inflation may remain above 2% for the next few years. This perception can affect not only the policies of the Federal Reserve but also the financial decisions of investors and ordinary citizens.
