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On 22 October, a measure of investors’ outlook for inflation notched its worst mark since 2012.
The 10-year breakeven rate gauges what investors think a rate of return would have to be to match inflation over the next decade.
Last week, the rate rose to 2.64, according to Federal Reserve Economic Data.
The breakeven rate is calculated by comparing the difference in yields between nominal treasury securities and treasury inflation-protected securities (TIPS).
The two securities will yield the same return if the average annual inflation rate matches the gap between the two over a specific period of time, usually 10 years.
The breakeven rate rose after the U.S. labor department reported that inflation ran at 5.4 percent in September, compared to a year earlier.
Investors had expected inflation to ease in coming months as knots in supply chains untangle, factories restock raw materials, and more goods reach consumers.
However, many now are darkening their outlook as energy prices spike, rents and home prices continue to rise, and the job market tightens, The Wall Street Journal reported.
During the first two weeks of this month, a net $2.1 billion flowed into funds focused on TIPS, according to data service Refinitiv, the most in two months, compared to $1.7 billion leaving taxable bond funds during the same time.
U.S. Federal Reserve officials have begun to admit that inflation has been stronger and more persistent than they had expected (see related story in this issue) and that the central bank is likely to boost interest rates next year.
However, the Fed does not expect current inflation to become a long-term factor in the economy, Fed chair Jerome Powell has said several times.
Raising interest rates curtails borrowing, which slows consumer spending. Less spending puts less upward pressure on prices but also throttles back economic growth.
TRENDPOST: As long ago as 4 August, 2020, we warned in our “Global Economic Trends” section that supply-chain disruptions would lead to inflation and that those disruptions would make inflation a long-term problem (“Consumer Prices Rise in July,” 18 Aug 2021).
TREND FORECAST: Shortages of essential items and kinks in the supply chain will hold higher inflation in place through next spring and at least until the middle of 2022.
As those crimps loosen, demand will surge for materials that have been in short supply for months, giving inflation new fuel for at least a few additional months.
And, we maintain our forecast that rising inflation will force the U.S. Fed to raise interest rates, and the more they raise them the deeper the economy and equity markets will sink.
And since the central banksters are members of the government crime syndicate, to support their president-in-charge, they will lower rates in the prelude to the 2024 Presidential Election to boost the economy and equity markets to enhance his chances for re-election… if he is still alive and/or has any brains left in his head.