RIP inflation

The meh jobs report, coupled with the slump in oil prices — down about 5% this week to ~$70 a barrel — has helped push expectations for inflation back below 2%, at least according to one key gauge.

The gorgeous blue line pictured below is the so-called five-year inflation breakeven, a thumbnail sketch of how investors in the government bond markets see the outlook for the consumer price index over the next five years. It measures the difference between the yield on five-year plain vanilla US government bonds and the yield on five-year inflation-protected US government bonds, known as TIPS.

The chart shows investors expect price pressures (according to CPI) to average a bit less than 2% a year over the next five years, with this measure of inflation compensation poised for its lowest closing level since 2020.

Many economists believe inflation expectations are an important factor in the psychology of price increases. As such, the recent drop in expectations is a big deal, indicating that the market believes that the Fed has essentially fixed the country’s problem with runaway price growth. That restoration of credibility likely will make the central bank feel better about starting its rate cutting process, which is widely expected to begin at its meeting this month.