Yearly implied inflation rates

Another step toward a better forecast

Yesterday, I showed a chart of average inflation expectations for different time horizons based on interest rates. We can take those rates one step further, however, and derive yearly interest rates from those different averages.

Let me give a simple example using the five and seven year rates using the same chart from yesterday:

The current expected inflation rate over the next five years is 2.59% and for seven years is 2.42%. If you think about it, since we know that years one through five are estimated here to be 2.59%, then years six and seven must be some lower rate to bring the overall seven year average down to 2.42%.

I’ll save the annoying math to do this but the rate in years six and seven to bring the average down is 2.00%. We can then do that again with the seven and ten year rates to get inflation for years eight through ten and any other two periods as well.

So, using the rates in that first chart, we can get the specific yearly rates for the entire thirty year horizon:

Now, we have specific inflation rates by year that we can use to make an even better forecast! We will see what that looks like tomorrow.

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