TYD - Assessing Market Expectations Of Inflation

• Economists continue to debate whether the high rates of inflation observed over the last few months are transitory or permanent. Year-on-year inflation was 4.3 percent in August.
• One way to estimate future inflation is to look at market expectations. Bond traders must consider inflation when deciding what they are willing to pay or accept.
• At present, the TIPS spread suggests bond traders are currently pricing in an annual rate of inflation of 2.64 percent over the next five years; 2.50 percent over the next ten years; and 2.24 percent over the next thirty years.

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