Diverging paths: Inflation expectations and 10-year Treasury yields
Source: Federal Reserve Bank of New York, Federal Reserve Bank of St. Louis, as of September 16, 2021.
- August’s consumer price index (CPI) came in lower than expected as many of the categories that had been responsible for the inflation surge of recent months (hotels, airfares, used cars, car rentals) reversed themselves as the summer travel season ended and the Delta variant ramped up.
- At the same time, consumer inflation expectations jumped again in August, further muddying the debate about whether recent increases in inflation are transitory or part of a new regime of higher prices.
- According to a New York Fed survey, expectations for inflation over the short- (1-year) and medium-term (3-year) rose to new series highs of 5.2% and 4.0%, respectively1 It was the tenth consecutive monthly increase in 1-year consumer expectations.1
- Against this backdrop, however, Treasury yields do not reflect expectations for higher economic growth or inflation going forward. As the chart shows, the 10-year U.S. Treasury yield remains stubbornly low and increasingly divorced from elevated inflation expectations. In fact, it is more reflective of the view that we may return to a relatively low growth/low inflation environment in a post-COVID world.
- With Treasury yields and inflation indicators pointing in opposite directions, it seems fair to say that the inflation debate could be with us for a while longer. For investors, an uncertain inflation outlook will continue to require a heightened awareness of pricing pressures that could further impact fixed income portfolios for the foreseeable future – whether inflation is transitory or not.