U.S. Expected Inflation Rate Hits Highest Since 2014... Oil Prices Near $60

[Image source= Bloomberg]

[Asia Economy Reporter Byunghee Park] Inflation expectations reflected in the U.S. bond market have risen to the highest level in eight years.

According to Bloomberg on the 8th (local time), the breakeven inflation rate, calculated by subtracting the yield on 10-year Treasury Inflation-Protected Securities (TIPS) from the yield on 10-year U.S. Treasury bonds, rose to 2.21%. Bloomberg reported that the breakeven inflation rate surpassed the 2.2078% recorded in 2018, marking the highest level since 2014.

The breakeven inflation rate was below 0.5% in March last year when the COVID-19 pandemic began. However, it steadily increased following economic stimulus measures by various governments and the distribution of COVID-19 vaccines. This year, the upward trend has continued, reflecting expectations for large-scale stimulus measures by U.S. President Joe Biden.

Peter Hooper, Head of Economic Research at Deutsche Bank, stated in a report on the 5th, "If President Biden's stimulus package is adopted, the U.S. GDP growth rate could soar to 7-8% this year, and the unemployment rate could fall below 4%." However, Hooper also pointed out potential side effects such as unwanted inflation, increased government fiscal burdens, and intensified political polarization.

Other financial market indicators also confirm rising expectations for inflation. The slope of the U.S. Treasury yield curve has steepened to its sharpest since 2015. A steepening yield curve means the interest rate gap between long-term and short-term bonds has widened, which is interpreted as a signal reflecting expectations of economic recovery and inflation.

On the same day, crude oil prices also rose more than 1% in after-hours trading. Bloomberg reported that Brent crude prices rose more than 6% last week and increased by about 1% more in after-hours trading, approaching $60 per barrel.

Although breakeven inflation is rising significantly, the U.S. central bank, the Federal Reserve (Fed), is not expected to begin tapering (reducing quantitative easing) immediately. The Fed introduced an average inflation targeting framework in August last year, committing to maintaining a long-term average inflation rate of 2%. This aims for long-term price stability while allowing room to continue stimulus measures even if short-term inflation exceeds 2%.

Bloomberg expects that the breakeven inflation rate must rise to 2.4% before Fed officials express confidence in achieving the inflation target. Until it reaches 2.4%, the current stimulus measures are expected to be maintained.

This content was produced with the assistance of AI translation services.