Survey-based US inflation expectations remain broadly stable

The drop in the market-based breakeven inflation rates has led to concerns that declining inflation outlook might trigger a deflationary spiral in the US. However, breakeven rates gauge inflation compensation rather than actual inflation outlook. On the contrary, according to survey-based measures, the inflation expectations of professional forecasters, businesses and consumers continue to be well-anchored.

The fall in longer-term yield spreads between nominal Treasury and inflation-protected securities (TIPS) is worrisome as the decline in five-year-forward rate is because of the fall in energy prices. According to Atlanta Fed's research, almost all of the fall in breakeven rates is due to the change in liquidity preference and inflation risk premia in the TIPS market. Underlying inflation expectations continue to be broadly stable.

Even if the actual inflation has been lower than the US Fed's 2% target rate for many years, the survey-based measures give very little proof that inflation expectations are at risk of becoming "unanchored". Consumers' long-run inflation outlook, taken from the University of Michigan's confidence survey continues to be stable. Also, the Atlanta Fed's survey of businesses shows that inflation expectations remain the same in the last few years.

Meanwhile, the recent Philly Fed survey of professional forecasts' indicates towards a marginal fall in long-run inflation outlook. Considering all things, there does not seem to be a widespread fall inflation expectations.

"More generally, while it was plausible that the US could spiral into deflation when the unemployment rate was close to 10%, it is much harder to make that case when the unemployment rate is 4.9% and there is clear evidence of accelerating wage growth and core services inflation", says Capital Economics.