The Federal Reserve’s preferred forward-looking inflation metric — called the five-year, five-year forward break-even inflation rate — implies that pricing risks to the economic outlook revolve around disinflation, not inflation, over the next 10 years.
The metric — which measures the expected inflation rate over the five-year period that begins five years from now — stands at 1.79%, just below the expected 10-year rate of 1.9% implied by market pricing 10 years hence. Notice that the current level is well below the 20-year average of 2.4%.
While we do not anticipate a return to the pandemic-induced low of 0.80% as the second wave of the coronavirus dampens economic activity over the next four to five months, one would expect forward-looking metrics of inflation to signal further disinflationary risks.
The policy implications of this are significant. This strongly suggests that the market does not expect inflation linked to current or future deficit spending. This also implies that there is sufficient fiscal and monetary space to address the current pandemic-induced crisis and modernize the economy and its aging infrastructure.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
