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Short-Term Inflation Expectations Drop Like a Rock

May 14th, 2010 Michael McDonough

Rampant risk aversion, receding energy prices, and a USD rally have led to significant steepening in the short-end of the U.S. breakeven curve, with the potential for more to come ahead of next week’s CPI release (see chart).  So long as risks in Europe continue to escalate and CPI growth comes in at or below consensus on 5/19 the market could see further steepening in the breakeven curve as near-term inflation expectations continue to moderate.  The bottom line here is that if this trend continues inflation hawks may once again take a back seat, while deflation rhetoric creeps its way back into the market. 

 Breakeven Curve:

Source: Bloomberg

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