A market-based measure of future inflation expectations is back near the top of its 10-year range, raising the possibility of more upside risks to price gains that could rattle financial markets.
More troubling than the almost 2.5% level itself, however, is that the 5y5y rate, also known as 5y5y forward breakevens, began to pivot about 20 basis points higher around mid-July — albeit in a choppy manner — even with no major developments, according to macro strategist Will Compernolle of FHN Financial in New York. In other words, future expectations drifted higher in the absence of any big news, marking a “huge inflection point,” he said via phone on Wednesday.
To be sure, a market-based expectation can also turn out to be completely wrong and, on its own, “doesn’t become a self-fulfilling prophecy,” he said. “No one know what the world is going to be like in 10 years, so it’s just a best guess and one piece of the puzzle.” As long as other surveys of inflation expectations such as the New York Fed’s remain stable, policymakers can be “cautiously comfortable with where breakevens are trading” for now, Compernolle said.
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