Chart of the Month: Inflation Expectations Break Out to Multi-Year Highs

Source: Federal Reserve Board of St. Louis

Market Observations

The bond market is telling investors that inflation is coming. Inflation expectations, as measured by the breakeven inflation rate, have risen to their highest level in nearly a decade. The breakeven rate, which captures the difference between 5-year U.S. Treasury yields and 5-year Treasury Inflation Protected Securities (TIPs), has climbed from a low of less than 0.15% last March, when the pandemic swept across the nation, to its current level of 2.35%. The sharp move has been fueled by aggressive monetary and fiscal support, progress on the vaccine rollout, and the hope that pent-up demand will bring consumers roaring back once pandemic restrictions begin to ease. While inflation currently remains muted, inflation pressures are set to move higher in the months ahead as the economic recovery gains traction and unfavorable yearly comparisons, supply disruptions, and rising commodity prices start to kick in. The key question for the markets is: How long inflation will remain elevated? Given the Fed’s desire to push inflation higher, it may be worthwhile for investors to consider sectors that outperform when growth and inflation begin to accelerate.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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