Inflation Expectations Are Running 2.5-2.9%

The Consumer Price Index climbed 7.0%, the biggest 12-month gain since 1982, when the US economy saw one of the worst spells of inflation in history. The CPI rose due to rising auto prices, clothing, home goods, and restaurant costs. 

The supply constraints that have limited the availability of product inputs will be resolved. 

No one knows when it will happen. 

Nonetheless, the patterns will improve. 

Consumer prices rose 0.5 percent in December, down from 0.8 percent in November and 0.9 percent in September. 

Prices of gasoline, natural gas, and fuel oil fell throughout the month after a long run of hikes, helping to offset other price increases. 

Automobiles accounted for approximately half of the 0.34 percent excess inflation in December, which was above pre-pandemic rates. 

Expect the vehicle shortage, as well as other shortage-related issues, to ease.

While inflation is high, the bond market shows investors do not expect it to worsen soon. This is partly owing to the Fed’s increasing focus on inflation and indications of rate hikes starting March 2022. 

The break-even inflation rate shows that. 

This rate is the difference between the nominal Treasury yield and the Treasury Inflation-Protected Securities yield. 

Break-even rates:10-year 2.5%. 5-year 2.9%.