Fed’s patience tested by inflation

Sources: Bloomberg and Wells Fargo Investment Institute. Market’s 5-year/5-year forward inflation rate: monthly data from January 1, 2011 to June 30, 2022. PCE core deflator: monthly data from January 1, 2011 to May 31, 2022. PCE deflators (or personal consumption expenditure deflators) track overall price changes for goods and services purchased by consumers. Deflators are calculated by dividing the appropriate nominal series by the corresponding real series and multiplying by 100. The market’s 5-year/5-year forward inflation rate is a common measure that is used by central banks and dealers to look at the market’s future inflation expectations. Fed = Federal Reserve. PCE = personal consumption expenditures.

Key Takeaways

  • Investors’ near-term inflation expectations have fallen behind actual inflation, likely a sign that the market is unprepared for persistently high inflation.
  • 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.