Wall Street inflation gauge surges to 4.62%, the specter of inflation is back.
2026-03-13 13:21:18
As the Middle East conflict continues to escalate, a key Wall Street indicator on Thursday reflected the inflationary panic that the Trump administration least wanted to see before the midterm elections.
As US and Israeli military action against Iran escalates and shipping through the Strait of Hormuz is disrupted, market expectations for short-term price increases are approaching the average level of around 5% during the Biden administration. Since Trump's second term in January 2025, he has touted substantial progress in reversing inflation, but Iran's new Supreme Leader's vow to continue blocking the key strait has caused oil prices to break through $100 per barrel again, leading to a sharp rise in inflation expectations.
According to Bloomberg data, the one-year break-even inflation rate, which reflects inflation expectations for the next year, jumped to 4.62% on Thursday, the highest level since June 2022, when the CPI peaked at 9.1%. This indicator has risen rapidly from 3.97% on March 2 (days after the massive US-Israeli airstrikes on Iran). The two-year break-even inflation rate rose to 3.18%, the highest since April last year, a significant increase from 2.9% in early March.
The breakeven inflation rate, calculated as the difference between the nominal yield on U.S. Treasury bonds and the yield on Treasury Inflation-Protected Securities (TIPS), is designed to measure market expectations of inflation over a given period. On Thursday, this indicator rose sharply in both the short and medium term, suggesting that market concerns about persistently high oil prices have shifted from short-term shocks to more persistent inflation risks.
Lawrence Gillum, chief fixed income strategist at Charlotte LPL Financial, said rising short-term inflation expectations pose a problem for investors who are retired or nearing retirement and hold 1-year and 2-year U.S. Treasury bonds. These bonds are popular because of their cash-like characteristics, but falling prices and rising yields mean that investors could have earned higher returns if they had bought them later.
He added, "The one-year and two-year breakeven inflation rates are highly volatile and strongly correlated with oil prices, and are currently clearly 'de-anchored,' indicating that the market remains highly concerned about short-term inflation." "De-anchoring" refers to the possibility that inflation expectations may become persistent and self-fulfilling, negatively impacting economic stability.
Long-term breakeven inflation also rose. According to FactSet data, the five-year breakeven inflation rate rose 5 basis points to 2.58% on Thursday, further breaking through the psychological threshold of 2.5%, a level typically seen as a fear signal of continued upward pressure on inflation.
"The breakeven inflation rate suggests that the market believes oil prices will remain high for at least some time," said Tom Graff, chief investment officer at Facet in Baltimore. He added, "This isn't a scenario where oil prices surge to $100 and then quickly fall back to $75. We're not facing a short-lived shock."
If high inflation prevents the Federal Reserve from cutting interest rates from the current 3.5%-3.75% range, "it's not good for anyone," including stock investors.
U.S. stocks closed sharply lower on Thursday, while Brent crude oil broke through $100 a barrel. The yield on the policy-sensitive 2-year Treasury note jumped 12.6 basis points to nearly 3.76%, marking its biggest one-day gain since May 2025. Traders currently believe there is a 44.7% probability that the Federal Reserve will not cut interest rates this year.
Since taking office, Trump has repeatedly emphasized that his economic policies have significantly alleviated inflationary pressures. However, the largest oil supply disruption in history caused by the Iran war is pushing inflation expectations back to levels seen during the later stages of the Biden administration. Markets are concerned that if oil prices and inflation remain high, it will undermine the credibility of Trump's energy policies and amplify Democratic attacks ahead of the November midterm elections.
The Federal Reserve will face greater pressure at its policy meeting next week (Tuesday and Wednesday local time) as officials weigh the dual challenges of rising inflation risks and slowing economic growth.
Overall , the escalation of the Middle East war has transformed inflation expectations from a short-term shock into a systemic concern. The one-year breakeven inflation rate has surged to 4.62%, and the five-year rate has surpassed 2.5%, indicating that market fears of persistently high oil prices and inflation becoming decoupled are intensifying. The Trump administration's narrative that "inflation is under control" is facing a severe test of reality.
Investors need to be highly vigilant about next week's Fed meeting statement, oil price movements, and developments in the Middle East, as these factors will directly determine the short-term path of monetary policy and asset price trends. If inflation expectations spiral further out of control, the Fed's room for easing will be significantly reduced, and volatility in the US stock and bond markets may increase substantially.
As US and Israeli military action against Iran escalates and shipping through the Strait of Hormuz is disrupted, market expectations for short-term price increases are approaching the average level of around 5% during the Biden administration. Since Trump's second term in January 2025, he has touted substantial progress in reversing inflation, but Iran's new Supreme Leader's vow to continue blocking the key strait has caused oil prices to break through $100 per barrel again, leading to a sharp rise in inflation expectations.
The one-year breakeven inflation rate surged to its highest level since June 2022.
According to Bloomberg data, the one-year break-even inflation rate, which reflects inflation expectations for the next year, jumped to 4.62% on Thursday, the highest level since June 2022, when the CPI peaked at 9.1%. This indicator has risen rapidly from 3.97% on March 2 (days after the massive US-Israeli airstrikes on Iran). The two-year break-even inflation rate rose to 3.18%, the highest since April last year, a significant increase from 2.9% in early March.
The breakeven inflation rate, calculated as the difference between the nominal yield on U.S. Treasury bonds and the yield on Treasury Inflation-Protected Securities (TIPS), is designed to measure market expectations of inflation over a given period. On Thursday, this indicator rose sharply in both the short and medium term, suggesting that market concerns about persistently high oil prices have shifted from short-term shocks to more persistent inflation risks.
Retirement investors are impacted: short-term US Treasury prices fall and yields rise.
Lawrence Gillum, chief fixed income strategist at Charlotte LPL Financial, said rising short-term inflation expectations pose a problem for investors who are retired or nearing retirement and hold 1-year and 2-year U.S. Treasury bonds. These bonds are popular because of their cash-like characteristics, but falling prices and rising yields mean that investors could have earned higher returns if they had bought them later.
He added, "The one-year and two-year breakeven inflation rates are highly volatile and strongly correlated with oil prices, and are currently clearly 'de-anchored,' indicating that the market remains highly concerned about short-term inflation." "De-anchoring" refers to the possibility that inflation expectations may become persistent and self-fulfilling, negatively impacting economic stability.
Long-term breakeven inflation also rose. According to FactSet data, the five-year breakeven inflation rate rose 5 basis points to 2.58% on Thursday, further breaking through the psychological threshold of 2.5%, a level typically seen as a fear signal of continued upward pressure on inflation.
Market expectations: Oil prices will not fall quickly, and inflationary pressures may persist for a long time.
"The breakeven inflation rate suggests that the market believes oil prices will remain high for at least some time," said Tom Graff, chief investment officer at Facet in Baltimore. He added, "This isn't a scenario where oil prices surge to $100 and then quickly fall back to $75. We're not facing a short-lived shock."
If high inflation prevents the Federal Reserve from cutting interest rates from the current 3.5%-3.75% range, "it's not good for anyone," including stock investors.
U.S. stocks closed sharply lower on Thursday, while Brent crude oil broke through $100 a barrel. The yield on the policy-sensitive 2-year Treasury note jumped 12.6 basis points to nearly 3.76%, marking its biggest one-day gain since May 2025. Traders currently believe there is a 44.7% probability that the Federal Reserve will not cut interest rates this year.
Trump's promise to reverse inflation faces a severe test.
Since taking office, Trump has repeatedly emphasized that his economic policies have significantly alleviated inflationary pressures. However, the largest oil supply disruption in history caused by the Iran war is pushing inflation expectations back to levels seen during the later stages of the Biden administration. Markets are concerned that if oil prices and inflation remain high, it will undermine the credibility of Trump's energy policies and amplify Democratic attacks ahead of the November midterm elections.
The Federal Reserve will face greater pressure at its policy meeting next week (Tuesday and Wednesday local time) as officials weigh the dual challenges of rising inflation risks and slowing economic growth.
Overall , the escalation of the Middle East war has transformed inflation expectations from a short-term shock into a systemic concern. The one-year breakeven inflation rate has surged to 4.62%, and the five-year rate has surpassed 2.5%, indicating that market fears of persistently high oil prices and inflation becoming decoupled are intensifying. The Trump administration's narrative that "inflation is under control" is facing a severe test of reality.
Investors need to be highly vigilant about next week's Fed meeting statement, oil price movements, and developments in the Middle East, as these factors will directly determine the short-term path of monetary policy and asset price trends. If inflation expectations spiral further out of control, the Fed's room for easing will be significantly reduced, and volatility in the US stock and bond markets may increase substantially.
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