Rising expectations raise concerns of upside risks to inflation

  • Market-based measure of future inflation expectations near top of its 10-year range
  • 5-year, 5-year forward inflation expectation rate trading near 2.5%
  • 5y5y rate began to pivot about 20 basis points higher in mid-July
  • Change in 5y5y forward rate adds to concerns of upside risks to inflation
  • Americans can feel the stress of inflation even when it’s drifting lower

A market-based measure of future inflation expectations, the 5-year, 5-year forward inflation expectation rate, is trading near the top of its 10-year range at around 2.5%. This rate, which reflects expectations for average inflation between 2028 and 2033, has been steadily increasing since mid-July, raising concerns of potential upside risks to price gains. The recent jump of about 20 basis points in the 5y5y forward rate has puzzled analysts, as there have been no major developments to explain the increase. While market-based expectations can be unreliable, the Federal Reserve is concerned that if these expectations continue to rise, it could lead to panic and uncertainty. Despite this, policymakers are cautiously comfortable with current breakeven levels, as other surveys of inflation expectations remain stable. The next major U.S. inflation update is expected with the release of the consumer-price index for October.

Factuality Level: 7
Factuality Justification: The article provides information about the 5-year, 5-year forward inflation expectation rate and its potential implications for financial markets. It includes quotes from a macro strategist and mentions relevant data sources. However, it lacks specific details about the factors driving the increase in the rate and does not provide a comprehensive analysis of the potential impact on the Federal Reserve and the economy.
Noise Level: 4
Noise Justification: The article provides some information on inflation expectations and their potential impact on financial markets. However, it lacks depth and analysis, and there is a lot of filler content and repetition of information. The article also does not provide any evidence or data to support its claims. Overall, the noise level is relatively high.
Financial Relevance: Yes
Financial Markets Impacted: The article discusses the possibility of upside risks to price gains that could rattle financial markets.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article focuses on the market-based measure of future inflation expectations and its potential impact on financial markets. There is no mention of any extreme events or their impact.
Key People: Will Compernolle (Macro Strategist)

Reported publicly: www.marketwatch.com