The bad omens that point to a new inflationary rebound are finding support in some market indicators. The main central banks of the planet, the Federal Reserve and the European Central Bank, continue with the process of rate cuts, but in recent weeks they have had to moderate their enthusiasm in this regard, and little by little they recognize, with more and more clarity, that we must be careful with the increase in prices. Now, one of the inflation indicators that central banks most monitor to assess the long-term CPI outlook, the 5y5y inflation swaps, is resisting falling to the target of the Fed and the ECB. It is bad news, and even more so if we add to it the inflationary fears due to Donald Trump’s policies, the latest inflation data in Europe and the surveys managed by the ECB for the medium term, or the recent doubts of the Fed about the return of inflation to the level of 2%.
The long-term inflation expectations indicator monitored by the ECB has given the central bank joy in recent months, but the satisfaction has not lasted too long. The 5y5y inflation swap in the euro zone, which measures the inflation expectations that the markets maintain for the five years that begin in five years, has barely lasted a month at around 2%, the objective maintained by the central bank. In December, the swap fell below 2% for the first time in over 2 years, but the start of 2025 has changed the picture quickly.
The euro zone inflation swap It has gone from around 1.9% to 2.12% in a few weeks. The increase has come at a time when there is growing concern about the inflationary impact of the policies that Donald Trump may adopt, upon his appointment on January 20, both in the United States and outside its borders.
In Europe, in the first week of the year a rate cut planned for this year was erased by the markets, and the latest consumer survey carried out by the ECB has confirmed an unexpected increase in expected inflation by of respondents in the coming months. The latest CPI data hasn’t helped either, with a new increase in December. Although the increase in inflation data was already expected, the increase in economies such as Germany and Spain was greater than had been anticipated.
In the United States the situation is similar, and somewhat more worrying. The long-term inflation swap remained well above the levels seen in Europe, at a time when the US economy was showing more vigor than that of the euro zone. The inflation swap moved at around 2.4% at the end of last year, and In January it took a leap that took it to almost 2.6%six tenths above the target of the US Federal Reserve.
The levels at which these indicators of long-term inflation expectations move in the United States confirm the fears of those analysts who are warning that inflation is going to be structurally higher in this economic cycle, compared to what has been seen in the years leading up to 2021, when the last big inflationary surge began. If this is confirmed, as long-term inflation expectations swaps suggest, the interest rate floor will be higher than expected.
The minutes of the latest Federal Reserve meeting have confirmed the Federal Open Market Committee’s growing concern about inflation, a reality that fits with the rebound in expectations that has occurred in recent weeks. The document confirms that several members were reluctant to cut rates at this meeting, and that there is growing concern about the possible inflationary impact of the policies promised by Donald Trump.
#Inflation #stirs #longterm #indicators #headache #central #banks
