Inflation expectations rise faster in US

 

• Latest data suggest that consistent FED over the rate hike this year might be succeeding to anchor the inflation expectation over the longer horizon.

• 5 year break even inflation rate as shown in the chart is rising much faster rate after falling to the lowest point in January.

• The rate has jumped nearly 50 basis points after making a low in of 1.16 percent in January.

• Similarly other measure like 5 year, 5 year forward inflation expectation is hovering near 2.20 percent after similar slump below 2 percent in January.

• Similar trend can be seen in 10 year break even inflation rate, hovering near 2 percent.

• As argued before, FED could be pushing the inflation expectation through forward guidance affecting the term premium.

• Such success could be short lived if actual inflation as measured by CPI, PCE, PPI etc. fail to arrive.

Impact -

• Latest push of the dollar against the currencies could be partly fueled by the above expectation anchoring and rise.

• Under such circumstance dollar is expected to strengthen further and yields firmer over the medium term.