From 5-Years To 30-Years, TIPS Implied Inflation Expectations Are Under 2%

Inflation is falling and so are inflation expectations. We and the majority of the rest of the financial community have been highlighting this for most of 2015. Tomorrow, we finally will get the latest US CPI release (for February) to see what is driving consumer inflation but in the mean time we wanted to give an update on what the bond market is telling about inflation. Spoiler Alert: the bond market believes in lower inflation as well.

In fact, for the first time since 2009, TIPS implied inflation expectations for the US are all below 2% on a 5-year, 7-year, 10-year and 20-year basis. The 30-year TIPS implied inflation expectation is also below 2% (this series started in 2010). Inflation expectations have been on a steady decline since last summer. Over the past nine months, inflation expectations have fallen between 41-51 basis points.  The declines have moderated somewhat in 2015, however, the downward trend doesn't look like it has reversed. The question facing investors now is has 2% inflation become a ceiling, not a target? (h/t F. Hale Stewart)