While the potential for inflation accelerating further is limited, modest upside risks remain, which could translate into opportunities... Read more...
U.S. inflation has normalized, with the consumer price index rising and breakevens at multiyear high levels as the Federal Reserve continues down the path of gradual tightening of policy rates.
The Fed has noted inflation's rise and become more confident about its path of tightening policy rates, which may counter a further increase in TIPS breakevens; the central bank could be more likely to react if inflation rises with additional tightening measures.
Some upside risk remains in TIPS breakevens, particularly if oil prices remain elevated, but it is important to remember that the secular forces of technology and demographics remain in place—keeping the prospect for runaway inflation at bay.
With oil prices rising steadily since last June, inflation-linked debt in Europe has reacted in a similar fashion to U.S. TIPS.