The market-based measures of US inflation expectations hovered nearly six-month highs on Monday. Inflation expectations were bolstered last week by data showing higher producer and consumer prices in July, according to Reuters News.
The spread between the 10-year Treasury inflation-protected security and regular 10-year bond, also known as the 10-year breakeven inflation rate, was 1.66% on Monday, having hit a high of 1.67% last week. That was the highest level since Feb. 6, according to data source St. Louis Federal Reserve.
Inflation expectations dropped to 0.5% in March after stock markets collapsed on coronavirus pandemic, triggering deflation worries. However, the decline from 1.4% to 0.5% was quickly reversed as the Federal Reserve and other major central banks launched unprecedented liquidity-boosting initiatives to counter the recession/deflation fears.
The breakeven rate stood at 1.55% at the end of July and recently received a boost from an above-forecast US consumer price index data.
While inflation expectations have improved, they still remain significantly lower than the Fed’s 2% price target. As such, the recent uptick is unlikely to influence the Fed’s ultra-accommodative monetary policy stance. Besides, speculation is rife that the central bank may soon signal greater tolerance for above-target inflation.
10-year breakeven rate
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