What next for US inflation expectations?

Chart of the week

As inflation has heated up in recent months, so has the debate over how temporary the upswing that began last spring will prove to be. Although investors had been anticipating an uptick in inflation, long-term expectations, as measured across inflation swap curve maturities, relatively confidently indicated that inflation would return to the more moderate levels seen in the last five years. Is the inflation picture now changing?

OUR ANALYSIS

The 5-year 5-year forward inflation swap rate reliably measures the market’s long-term inflation expectations. It indicates the inflation rate that investors are willing to receive or pay to hedge inflation exposure between the end of 2026 and the end of 2031.

The graph above shows that until the end of 2014, long-term inflation expectations had remained relatively stable at around 2.9%. Then, as oil prices plummeted, the inflation rate slowed significantly. By the end of 2015, the consumer price deflator had slowed to 1.1%. The shift caused long-term inflation expectations to ratchet down and they have since hovered near to 2.2% without breaking through an upper level of 2.5% that had previously been at the lower end of the range.

Since the beginning of October, this long-term expectations measure has indeed broken through the 2.5% mark. If the upswing continues, it will signal a major shift in market psychology as well as an end to deflationary fears.

 

See also: https://lazardfreresgestion-tribune.fr/en/european-banks-turn-the-page-on-loans-under-moratoria/

 

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The following opinion was written on October 25, 2021 and is susceptible of changing.

Sources : Bloomberg, and calculation from Lazard Frères Gestion

As of : October 25, 2021

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