Expectations of rising consumer prices have been hitting the headlines recently. But the long-term trend is towards lower prices.

The chart below shows the 5-year breakeven rate on U.S Treasury Inflation-Protected Securities (TIPS). The breakeven rate is the difference between the yield on a nominal bond and the yield on a TIP. As such, it represents the market expectation of the average annual increase in the Consumer Price Index (CPI) over the duration of the bond. As we can see, so-called inflation expectations have been shrinking since 2005. What is particularly striking is that they have not (at time of writing) exceeded the previous reaction high of 2.06% in February 2017. In other words, the series of lower highs over the last thirteen years remains, at this juncture, intact. In anybody’s book, that is the definition of a downtrend. The relentless, glacial force towards lower prices remains in operation.

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