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Future Inflation Calculator: What Does the Market Think?

September 6th, 2020 by 
PK

On this page is an inflation expectations calculator. Using breakeven rates on nominal and inflation adjusted notes in constant maturity debt, we show the market's inflation expectations.

What are current inflation expectations?

Below is the inflations expectations tool showing the market's current prediction for forward inflation. Numbers are annualized, in percent, over the next x number of years stated.  Inflation is CPI

How Does The Inflation Expectations Calculator Work?

We use the resource Quandl heavily to filter and host the data.

With a one month lag – due to data formatting – this calculator automatically graphs inflation expectations until the last trading day of last month. (If you're looking for a past inflation calculator, try the daily CPI calculator).

What are inflation expectations?

Simple stated, inflation expectations are how much people think prices will change in the future. While inflation measures the past, it helps to know what to expect for prices changes over the next few years.

How are inflation expectations measured?

The Treasury reports two very important series daily: constant maturity treasury rates and real yields. The latter is adjusted for inflation and the former is a nominal price. The relationship between them factors in inflation, and perhaps a couple other factors.

The reason we know this relationship exists? 

The Treasury literally tells us. They issue inflation-linked products like TIPS. The equilibrium, or breakeven, point is where the market buys TIPS versus buyers of non-adjusted securities.

See, it's like magic!

Is This the Best Method to Predict Inflation?

No - and it's not the one the Federal Reserve uses. In fact, while the spread does capture inflation it's not the only factor involved. We also wrote about methods to track inflation.

If you are interested in a more hardcore inflation expectation methodology, read the Cleveland Fed's paper "Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps". They lay out some methods which you can use to forecast inflation including using swaps.

If that reading is too heavy for you, they also publish their data monthly, for all time frames between 1 and 30 years. Give that data a look.

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