Inflation Expectations are Increasing Again

Inflation expectations are picking up again, as a rebound in oil prices helps ease an early-year deflation scare.  Measures tracked by the Federal Reserve and the European Central Bank have risen to the highest levels since December. The five-year forward five-year break-even rate in the U.S., which measures annual inflation currently expected by investors between 2020 and 2025, was 2.034% on April 29, the latest data available from Crédit Agricole.

The development is a good sign for investors who are betting that interest rates and the economy are on a normalization path seven years after the financial crisis. Low inflation has complicated the Fed’s plan to raise interest rates for the first time since 2006. Fed officials last week said they need to see more jobs created and inflation nearer their 2% target before they consider lifting benchmark borrowing costs from near zero.

“At the margin, this will certainly be welcome news at the Fed and is a precursor to raising rates,’’ said Collamore Crocker, managing director of global inflation markets at Mesirow Financial. “It is not the only factor, however, and with other recent economic data softening, we hold to our view that a [rate increase] before September remains very unlikely.”