The Treasury market is implying substantially more inflation over the next decade than it did in the fall. That rise may have as much to do with investors worrying less that the world is about to fall apart than a belief that inflation is headed inexorably higher.
The 10-year break-even rate, or the difference between the yield on the 10-year Treasury note and the 10-year Treasury inflation-protected security, is often looked at as bond-market investors’ judgment of where inflation is headed. It now stands at 2.2 percentage points, a half-point above its level at the start of November and near its highest since 2014.
There are some good reasons for thinking inflation over the long haul might be higher than one would have thought back in the fall. With millions of Americans getting vaccinated each week and another round of government support on its way, expectations for how quickly the economy will recover from the Covid-19 crisis have stepped up. Even so, the Federal Reserve has remained steadfast about its intention to get inflation a bit above its 2% target—and not just for a little while, as seems possible in the early stages of reopening the economy.
Forecasters, Wall Streeters and ordinary Americans never had inflation projections quite as low as what the break-even rate implied through much of last year. By the same token, while they have nudged up their expectations for what inflation will do over the next decade, they haven’t done so by nearly as much.
A Federal Reserve Bank of Philadelphia survey shows that, as of this quarter, economists expect the Labor Department’s measure of consumer inflation to average 2.2% over the next decade, versus an estimate of 2.12% last quarter. A Federal Reserve Bank of New York survey in January showed that bond-market participants expect inflation of 1.95% over the next five years, and 2.14% in the five years after that, which compared with October estimates of 1.85% and 2.1%, respectively. And in the University of Michigan’s February survey of consumers, respondents said they expected inflation to average 2.7% over the next 5 to 10 years, which was close to its fall readings.
