Breakeven Rates Signaling a Potential Slowing of Inflation

As of mid-May 2022, expectations for future inflation show short-term signs of having peaked.

The breakeven inflation rate reflects the bond market’s expectation for future inflation. The St. Louis Federal Reserve makes two breakeven inflation rates available in its FRED online database: the five-year and the 10-year breakeven rates. For these two time frames, the breakeven inflation rates are the difference between the yields of nominal (fixed-income) Treasury bonds and Treasury inflation-protected securities (TIPS) bonds, each with maturities of five or 10 years, respectively.

We last showed the breakeven inflation rates in the July 2021 AAII Journal (“The Bond Market’s Expectations for Inflation”). Given the ongoing attention inflation has received and the price increases consumers have experienced since then, we are publishing updated charts.

As of mid-May 2022, expectations for future inflation show short-term signs of having peaked. This coincides with the April 2022 decreases in the consumer price index’s (CPI) rate of change. The 12-month increase in the CPI was 8.3% in April versus 8.5% in March. The core CPI, which excludes food and energy, rose 6.2% on a 12-month basis in April versus a 6.5% increase in March.

FIGURE 1. 5-Year Breakeven Inflation Rate

FIGURE 2. 10-Year Breakeven Inflation Rate

Whether inflation has peaked remains to be seen. Bond traders were temporarily reducing their expectations last June also, before expectations for future inflation continued to rise. One difference now, however, is the Fed’s raising of interest rates to slow the pace of inflation.

Prevailing breakeven rates can be found at https://fred.stlouisfed.org/categories/33446. These rates provide insights but cannot accurately predict what will occur in the future. Like any market measure, breakeven inflation rates are subject to change as new economic data is released.