Investors’ Inflation Expectations Drop Ahead of CPI Report

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Market-based measures of inflation expectations have fallen sharply this week ahead of the consumer-price index report.

The five-year breakeven inflation rate—a measure of investors’ annual inflation expectations over the next half-decade based on the difference between nominal and inflation-protected Treasurys—stood Tuesday afternoon at 2.95%, according to Tradeweb. That was down from 3.25% Friday and the first time it has fallen below 3% since February.

Some analysts saw signs of moderating inflation pressures in Friday’s jobs report, as the monthly increase in average hourly earnings came in below expectations at 0.3%. Oil prices have also slipped this week.

Markets, though, have generally been volatile recently, and until this week, a notable development was investors pricing in more inflation not just for the next five years, but the five years after that—a sign some think the Fed might ultimately come to accept inflation above its current 2% target.

The so-called five-year, five-year forward breakeven inflation rate hovered around 2.5% last week but was down to 2.38% Tuesday. Breakeven rates reflect expectations for CPI inflation, which tends to run slightly above the Fed’s preferred gauge, the personal consumption expenditures price index.