Real vs Nominal Rates
TIPS and breakevens — what the inflation-protected market says about the inflation outlook
On June 10, 2022, the Bureau of Labor Statistics released its May 2022 Consumer Price Index report. The headline number — year-over-year CPI inflation — printed 8.6%, the highest reading in over four decades.
The next month's release (June 2022 CPI, published July 13 2022) printed 9.1% — the cycle peak per BLS, the largest 12-month increase since November 1981. Most investors reading those headlines reasonably assumed the bond market was pricing in a permanent inflation regime shift — that the era of sub-2% inflation that had defined the 2010s was over and that long-run inflation expectations had de-anchored.
The bond market was pricing nothing of the sort. The 5-Year, 5-Year Forward Inflation Expectation Rate (FRED series T5YIFR) — the bond market's implied inflation expectation for the five-year period starting five years from June 2022 — was sitting near the Fed's 2% target throughout the period.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1Breakeven inflation — the third number
- 2TIPS yields decompose nominal yields — and the term-premium piece
- 3The Fisher decomposition with term premium
- 4Breakeven inflation series and what they measure
- 52022-2024 — when headline CPI hit 9% and long-run expectations stayed near 2%
- 6Where to see this on the platform
- 7Summary