Long-term Inflation Expectations are Moderating

A look at the ten-year rate

The ten-year breakeven inflation rate captures the market’s expectation for inflation over the next ten years at a given point in time:

It’s easy to see that levels are elevated. However, they are down noticeably from their recent peak. This means that the expectation for the average inflation rate over the coming ten years is down.

More importantly, we should recognize that while inflation is high now, the long-term average is not nearly as high. This suggests that the market believes that inflation will be a temporary episode. I won’t use the word transitory since that has some negative press now but the point is that inflation is not expected to run at the current level for a long time. Otherwise, this average rate would be much higher.

If inflation isn’t expected to last, what does that mean for stocks? Probably good things, since inflation is throwing all kinds of wrenches into company and market performance.

At some point in the near future then, we will begin to see signs of inflation moderating. That means the Fed can ease up on the hikes and become friendlier to the market. So, good things are coming to those who can ride out the current setback brought on by (though not solely by) this current inflation episode.