Are interest rate markets pricing an inflation problem?

Market pricing for inflation is near multi-year highs, but with major differences across curves and regions. We discuss the implications and risks for investors of rising inflation expectations.

Key takeaways from this note:

  • Global rates market pricing for inflation has surged to multi-year highs.
  • The market reaction to recent data and survey indicators suggests investors are more worried about inflation risks than many economists.
  • Inflation curves, however, reflect expectations for only temporary inflation pressures and show large cross-market differences.
  • Longer term forward inflation pricing levels are close to central bank targets and below levels that would typically signal a major concern for multi-asset investors.
  • Inflation tail risks – both higher and lower – have grown significantly and could lead to bouts of pressure across markets over the coming months and years.
  • Interest rate volatility is low despite the wider than usual distribution of inflation risks.

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