TIPS derived breakeven inflation expectations have started to fall once again in May. For a little context, starting in last June, breakeven inflation started a steady march lower that lasted until January of this year. Since that time, we have seen a rebound in inflation expectations. For example, five-year TIPS derived breakeven inflation fell from 205 basis points on June 25th, 2014 to just 105 basis points on January 13th, 2015. Inflation expectations rebounded over the next several months and five-year TIPS derived breakeven inflation eventually hit 172 basis points on May 5th, 2015. Since then, inflation expectations have fallen back towards 154 basis points. The story is similar using 10-year TIPS and 30-year TIPS.
One of the Fed’s preferred inflation measures, the 5-Year, 5-Year Forward Breakeven Inflation Rate, remains at the low end of its range over the past 12 years. It currently sits at just 2.06%. It is interesting to note that while TIPS derived inflation expectations were increasing for most of this year, they were increasing across different time dimensions (i.e. the 10-year TIPS and 5-year TIPS) at relatively the same rate. Consequently, the 5-Year, 5-Year Forward Breakeven Inflation Rate only rose as high as 2.16% on May 5th.