Bond Market Braces For July CPI Data: A Test Of Fed's Control Over Inflation

The bond market’s anticipation of long-term U.S. inflation is nearing its highest level in over a year, suggesting that the Federal Reserve might grapple with high inflation rates for an extended period.

As the market awaits the upcoming consumer price index figures, a pivotal long-term inflation predictor indicates a trend towards 2.5%. This is close to its apex in April 2022, which was the most elevated since 2014, as Bloomberg reported on Wednesday

This predictor, known as the 5-year/5-year forward inflation breakeven rate, offers insight into how bond investors project the average annual inflation over a five-year period, starting five years from now.

Chart: Market-Based Inflation Expectations Are On The Rise

This increase in the bond market’s inflation gauge contradicts the widely held belief that the Fed’s aggressive interest rate hikes will contain the biggest increase in consumer prices since the 1980s.

It is also in stark contrast with current traders expectations suggesting an 85% likelihood of the Fed maintaining rates unchanged in September and a 70% probability of the central bank doing that also in November. Fed futures already anticipate the first rate cut in March 2024.

Forecasts for this week’s consumer price index report project a 3.3% annual growth in July, the first uptick since June 2022.

The core inflation, excluding fluctuating food and energy costs, is predicted to dip marginally from 4.8% to 4.7%.

Read now: CPI Inflation Data Hits Thursday: 5 ETFs With Potential For Wild Market Moves

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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