Chart of the week

Could subdued global inflation expectations imply a rate cut ahead?

Is a Fed rate cut on the horizon? See how recent global inflation dynamics could cause further troubles for income-oriented investors.

April 26, 2019 | 1 minute read
5-year breakeven inflation rates
  • Global interest rates moved down this week as an important release on economic activity in Germany came in lower than expected and the Bank of Canada lowered its growth forecast for 2019 by 50 bps, from 1.7% to 1.2%.
  • Against the backdrop of slowing or sluggish economic growth rates across the developed world, market-based inflation expectations remain well contained. As the chart highlights, 5-year breakeven inflation rates currently range from 1.9% in the U.S. to just 0.2% in Japan.1 Inflation expectations have generally remained in their current ranges since 2017, following significant moves down beginning in 2014.
  • According to data released this week by the University of Michigan, survey-based inflation expectations for the next year stood pat in April from a month earlier while expectations for the next five years moved lower. Both figures are well off their highs of late 2018.
  • The latest survey on inflation expectations is particularly notable because researchers at the San Francisco Fed identified expectations as the “the dominant factor explaining inflation dynamics.”2
  • As both market- and survey-based expectations for inflation remain subdued, investors have increasingly come to expect that the Fed will cut interest rates again from an already low range of just 2.25%–2.50%. No matter the Fed’s next decision, recent data highlights the difficulties that income-oriented investors could continue to face for the foreseeable future.

  • Bloomberg, as of April 18, 2019 (latest data available).

  • Federal Reserve Bank of San Francisco,

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