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News & Views

Provided by the Investment Professionals of Frost Investment Advisors | March 28 , 2022

Break-Even Inflation Rate, Mortgages Rates Up; Yield Spreads on Edge

Five-Year Breakeven Inflation Rate Rises Quickly on Heels of Ukraine-Russia Conflict

The five-year breakeven inflation rate has moved up significantly over the last month since Russia launched its invasion of Ukraine on Feb. 24. This important indicator is an estimate of inflation that is assumed to be the normal level over the longer term. This measure fell significantly with the onset of the pandemic. It recovered as the equity markets surged and then was relatively stable for most of 2021. Recent inflation numbers have caused it to soar. The latest move implies markets expect the average inflation rate over the next five years will be about 3.7 percent. Per Federal Reserve Chairman Jerome Powell’s comments at the March FOMC meeting, the Fed is now focused on making sure inflation does not become entrenched at its current levels. The Fed fears that if consumers believe prices will continue to move higher in the future, demand could spike as consumers begin panic-buying in anticipation of those higher prices. This could result in a cost spiral, demanding higher interest rates to bring inflation to heel.

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