We already covered the yield curve’s reaction given today’s whopping consumer price levels. How about strictly inflation expectations in the market? TIPS, breakevens and such.

Unsurprisingly, shorter-term breakevens (5s) jumped 12 bps to a new high of 308 bps (boosted considerably following the auction on October 21st). Pulling up the rest of the inflation “curve”, the 10-year breakeven added a “mere” seven to a total of just 270 bps.

As has been the case all year, inflation expectations are inverted which is why I characterize the 10s as having been “pulled” upward with clear and visible reluctance. The market is, essentially, putting together short run consumer prices (remember, TIPS get reimbursed by the government using the CPI average) with a longer run which is being priced as nothing like those.

That’s the inversion and with today’s trading it is back at a record level.



In other words, even TIPS – despite returns predicated on this very CPI – are still measuring future CPI’s as if those currently are transitory. We don’t know what that means in terms of just how long “transitory” can last, the market is increasingly certain that it won’t hold a serious impact outside of whatever generically counts as the near term.

Like the flat and low nominal yield curve, TIPS are trading consistent with the other pricing this as something other than inflation. In fact, longer run inflation expectations have barely budged even as consumer indices accelerated at unusually high rates this year (like the PCE Deflator numbers will, too).



The 5-year/5-year forward rate end up only 232 bps today, a level that continues the post-2014 tradition of (literally) not buying short-term consumer prices. That’s the anchor from which the short run 5s breakevens are unable to overcome, thereby stretching the inverted spread to the 10s to their own record wide.

What’s equally interesting is how some consumer surveys of “inflation” reflect this same dichotomy in time therefore definition/cause versus effect. The University of Michigan’s, for example, its cobbled average for 1-year consumer inflation (CPI) expectations is like the more recent indices trending skyward. Regular folks quite naturally consider their own situation from the gasoline pump (or grocery checkout) on out.

Only for the short run, as it turns out.

Longer run expectations, like their TIPS market counterparts, these continue to run contrary to the elevation currently. The latest price conditions are having some effect like they are with market-based expectations, yet the divergence is even more pronounced here than in the bond market.

This also repeats the pattern from bond yields, being able to sort the different factors in CPI’s and the like, compartmentalizing short run non-economic issues from the real lack of real inflationary money.

Does the UofM only survey the bond market literate, which would preclude central bankers and followers of formal Economics? Of course not; consumers as regular people look at their own situation in the same way as those trading Treasuries: from inside the real economy without the inappropriate “filter” of orthodox interpretations which only get added later in mainstream media write-ups.



Where the latest UofM (October 2021) survey puts the 1-year “inflation” expectation at 4.8%, likely to go higher given today’s gasoline-soaked CPI, the 5-year stubbornly resists anything greater than 3% – even a tick lower last month, a downward revised 2.9%.

Perhaps this is because regular people like the bond market is clued in on the monetary aspects of the real economy; in other words, nothing like how QE is presented. In fact, TIPS and consumer surveys have only been influenced by the supply issues whether 2021 or earlier and this year combined with Uncle Sam’s temporary effect on demand – Jay Powell’s “flood” like Ben Bernanke’s before him hasn’t had any impact on any of yields, TIPS, or UofM.

Whether many have ever heard of Milton Friedman or know much about monetary history (pun intended), everyone in the bond market like the real economy seems to be intuitively aware of the difference between inflation and not inflation; between transitory and actual inflation, the latter being a strictly a money phenomenon. Bonds and the people, they each hear all about “money printing” and reckless abuse, yet no one is counting on either beyond the here or now.

Port problems and oil production woes, those are the other story.



While we await Michigan’s November results, the market, anyway, is as resolute as ever as to this crucial distinction – and therefore what it means. The yield curve and the TIPS curve remain as thoroughly convinced as ever how nothing has changed apart from CPI rates up to October 2021.

The latter sounds like inflation, yet all these things point to the fact it’s not.

To thoroughly emphasize and punctuate all these points and factors, look no further than the other side of TIPS: real yields. Already bad, getting worse. Not at all the kind of economic climate anyone should rationally associate with inflation, growth, acceleration, and however pleasing Jay Powell’s view of the unemployment rate.

On the contrary, real yields picture economic potential, intermediate and long run, where oil prices pour gasoline (harming consumers) on the smoldering fires of a likely future return to deflation (slowdown or more).

Downright ugly: