Line chart shows breakeven inflation rates of March, August, and September 2022
Y-axis: Breakeven inflation rates (%); x-axis: years, 0 to 30
In the short term, breakeven inflation rates for these three months are widely divergent. The March 25, 2022 rate is highest, at 6.3%, followed by the August rate at 2.5%, and the September 30, 2022 rate at 1.7%. At 10 years, rates have converged significantly, with the March rate at about 3.0%, the August rate at 2.5% and the September rate at about 2.2%.
Convergence continues, slowly from that point, with the March rate at 2.5% by year 30, the August rate at about 2.4%, and the September rate at about 2.1%.
Line chart compares “sticky” CPI with “flexible” CPI
Y-axis: 3-month moving average of year-over-year change (%); x-axis: 1968 to 2022.
Flexible CPI change peaks in March 1980 (16.3%). It peaked at 18.8% in May 2022 and by August 2022 it had fallen to 16.5%. Low points for flexible inflation occurred in 1987 (-3.2%), 2002 (-2.6%), 2009 (-5.8%), 2015 (-4.5%), and 2020 (-3.5%).
Sticky inflation sees peaks in 1980 (14.7%), but remains roughly in the 1.0% to 5.0% range from 1984 to 2021. It had risen to 5.8% as of August 2022.
Sources: Top chart: Bloomberg, U.S. Treasury Department, and Wells Fargo Investment Institute, as of September 30, 2022. Bottom chart: Bloomberg , Federal Reserve Bank of Atlanta, U.S. Department of Labor, and Wells Fargo Investment Institute. Sticky-price and flexible-price consumer price index: monthly data from January 1, 1968 to August 31, 2022. Breakeven inflation rates equate nominal, or observed, Treasury interest rates with their inflation-protected counterparts. Fed = Federal Reserve. CPI = consumer price inflation. Sticky inflation is measured by components that change pricing less frequently, such as rents, education and public transportations. Flexible inflation is measured by components that change pricing more frequently, such as car rental, gas and electricity.
Key Takeaways
- Shorter-term inflation expectations have come down noticeably from earlier this year, responding to recession worries, lower fuel costs, and improving global supply chains.
- More of inflation’s recent buildup has been due to easily reversible parts of the CPI, dubbed “flexible” inflation, than in the 1970s.
- Longer-term inflation expectations remain subdued by comparison despite recent increases, a sign that investors and households view recent increases largely as the product of shocks likely to dissipate in coming months.