{"id":37456,"date":"2025-10-30T09:08:17","date_gmt":"2025-10-30T09:08:17","guid":{"rendered":"https:\/\/financialrush.com\/?p=37456"},"modified":"2025-10-30T09:08:17","modified_gmt":"2025-10-30T09:08:17","slug":"whats-the-market-pricing-for-us-inflation","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=37456","title":{"rendered":"What\u2019s the market pricing for US inflation?"},"content":{"rendered":"<p> \n<\/p>\n<div>\n<p>Unlock the Editor\u2019s Digest for free<\/p>\n<p class=\"article__content-sign-up-topic-description o3-type-body-base\"><span>Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/span><\/p>\n<p><iframe class=\"article__content-sign-up-iframe close\" scrolling=\"no\" id=\"signUpIframe\" data-prev-url=\"\/register\/in-article-sign-up?ft-content-uuid=560eb4b6-5a91-4629-8f50-649f781595da\"><\/iframe><\/div>\n<div id=\"article-body\">\n<p>October is almost over and the US Bureau of Labor Staff \u2014 rather than collecting and checking price data \u2014 continue to be furloughed. <\/p>\n<p>While it\u2019s possible that the BLS will be able to survey firms not only on their prices in November, but also what their prices were in October, it seems increasingly likely that there will be no monthly CPI print for the first time since the series was initiated in 1921.<\/p>\n<p>The absence of accurate and timely inflation data impedes households from budgeting, companies from investment planning, and makes it harder for employees to negotiate wages. And sure, it complicates the Fed\u2019s job. Still, with around $7tn of inflation-linked bonds and contracts, traders are incentivised to have a pretty good answer. So, where do they think inflation is heading in the short-run?<\/p>\n<p>It turns out that the normal places we\u2019d go to answer this question \u2014 the market for short-dated break-even inflation rates set by inflation swaps and Treasury Inflation Protected Securities \u2014 provide wildly different answers. But before we give you these answers, let\u2019s set out why they are so different.<\/p>\n<h3 id=\"the-abcs-of-break-even-inflation-rates\" class=\"n-content-heading-3 o3-editorial-typography-subheading\">The ABCs of break-even inflation rates<\/h3>\n<p>Think of break-even inflation rates as the rate at which you\u2019re just as happy to hold a nominal US Treasury bond as <a href=\"https:\/\/www.ft.com\/content\/f9cf6d1a-0313-4c1f-aeb2-df1f64bd5d3e\" data-trackable=\"link\">an inflation-linked one<\/a>. Eg, if you knew for certain that inflation would average 2 per cent a year, you\u2019d be just as fine holding a TIPS bond with a 2 per cent real yield as a normal bond promising 4 per cent.<\/p>\n<p>And so break-even inflation markets are pretty much a $7tn prediction market where bond-types bet on where all the future CPI releases will come out. Crucially, like any prediction market, they hang on a precise definition of the settlement event. After all, you don\u2019t want $7tn of banks, hedge funds, etc arguing about what inflation <em>really<\/em> was. And the settlement events for break-even inflation rates are (essentially) defined as whatever the monthly BLS report says it is.<\/p>\n<p>But, if <a href=\"https:\/\/polymarket.com\/event\/when-will-the-government-shutdown-end-545?tid=1761754888309\" data-trackable=\"link\">Polymarket punters<\/a> are to be believed, there\u2019s little chance of the BLS doing the work needed to produce numbers anytime soon:<\/p>\n<div class=\"n-content-layout\" data-component=\"flourish\" data-component-id=\"25913928\" data-component-type=\"flourish-in-article\">\n<figure class=\"n-content-picture n-content-layout__container\"><a href=\"#25913928\"><picture data-asset-type=\"flourish\" data-flourish-id=\"25913928\" data-flourish-type=\"visualisation\">\n<div id=\"25913928\" class=\"cp-message o-message o-message--inform o-message--notice\" data-o-component=\"o-message\">\n<div class=\"o-message__container\">\n<div class=\"o-message__content\">\n<p class=\"o-message__content-main\">Some content could not load. Check your internet connection or browser settings.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p><\/picture><\/a><\/figure>\n<\/div>\n<p>So yes, we know where the CPI index <em>was<\/em>. And we\u2019d love the market to price where it <em>will be<\/em>. But in order to do this, it needs to find a way to <em>settle<\/em>.<\/p>\n<h3 id=\"settlement-fallbacks\" class=\"n-content-heading-3 o3-editorial-typography-subheading\">Settlement fallbacks<\/h3>\n<p>These backup approaches are called fallbacks. Without a fallback process, there would be no way to price trillions of dollars\u2019 worth of securities and derivative contracts in the event that something gets in the way of the publication of monthly numbers. You really <em>could<\/em> get into a world where hedgies, banks, etc go to court arguing about what inflation <em>really<\/em> is. And so, unsurprisingly, there is a pretty clear process to follow in just such an event.<\/p>\n<p>We got in touch with the US Treasury to ask what this was for TIPS, and they directed us to <a href=\"https:\/\/www.ecfr.gov\/current\/title-31\/subtitle-B\/chapter-II\/subchapter-A\/part-356\/appendix-Appendix%20B%20to%20Part%20356\" data-trackable=\"link\">Appendix B to Part 356, section 4(vi)<\/a>:<\/p>\n<blockquote class=\"n-content-blockquote o3-editorial-typography-blockquote\">\n<p>If the CPI for a particular month is not reported by the last day of the following month, we will announce an index number based on the last available twelve-month change in the CPI. We will base our calculations of our payment obligations that rely on that month\u2019s CPI on the index number we announce.<\/p>\n<\/blockquote>\n<p>Simple. And this is presumably the same fallback used by inflation swaps? Here\u2019s BofA\u2019s Meghan Swiber:<\/p>\n<blockquote class=\"n-content-blockquote o3-editorial-typography-blockquote\">\n<p>In September 2023, ahead of government shutdown risks, ISDA (International Swaps and Derivatives Association) <a href=\"https:\/\/www.isda.org\/a\/j07gE\/ISDA-Guidance-for-Delayed-Publication-of-CPI-U-Published-Guidance.pdf\" data-trackable=\"link\">published a document<\/a> that stated a fallback provision that would be calculated such that: Substitute Index Level = Base Level x (Latest Level\/Reference Level).<\/p>\n<\/blockquote>\n<p>These fallbacks seem\u2009.\u2009.\u2009. different?<\/p>\n<div class=\"n-content-layout\" data-component=\"flourish\" data-component-id=\"25917616\" data-component-type=\"flourish-in-article\">\n<figure class=\"n-content-picture n-content-layout__container\"><a href=\"#25917616\"><picture data-asset-type=\"flourish\" data-flourish-id=\"25917616\" data-flourish-type=\"visualisation\">\n<div id=\"25917616\" class=\"cp-message o-message o-message--inform o-message--notice\" data-o-component=\"o-message\">\n<div class=\"o-message__container\">\n<div class=\"o-message__content\">\n<p class=\"o-message__content-main\">Some content could not load. Check your internet connection or browser settings.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p><img decoding=\"async\" src=\"https:\/\/images.ft.com\/v3\/image\/raw\/https%3A%2F%2Fpublic.flourish.studio%2Fvisualisation%2F25917616%2Fthumbnail%3FcacheBuster%3D978786?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=2626&amp;dpr=1\" alt=\"\"\/><\/picture><\/a><\/figure>\n<\/div>\n<p>Basically, the Treasury\u2019s approach means pretending that last month\u2019s CPI inflation rate was whatever the average monthly inflation rate was over the previous year. Meanwhile, ISDA simply pretends that last month\u2019s CPI inflation rate was whatever it was during that particular calendar month the previous year \u2014 so that the annual CPI rate stays frozen at the 3.01 per cent rate recorded at the end of September.<\/p>\n<p>We\u2019re not quite sure why ISDA chose such a different fallback process, but the consequence of their choice seems increasingly significant the longer the government shutdown persists.<\/p>\n<p>Remember, the break-even inflation market is akin to a huge prediction market. Just like punters guessing when the government shutdown will end on Polymarket, traders and investors in the break-even inflation market are trying to predict the numbers that will be spat out at settlement events. <\/p>\n<p>And as long as the BLS is shut, the numbers that traders are incentivised to forecast are not monthly inflation numbers. They are the numbers that fallback processes spit out. OK, having ersatz index-fixes in the short-run shouldn\u2019t have a crazy level of impact on longer-term break-even inflation rates. But short-term break-even inflation rates are utterly borked.<\/p>\n<p>Or as Jonathan Hill, head of US inflation market strategy at Barclays, puts it (his emphasis):<\/p>\n<blockquote class=\"n-content-blockquote o3-editorial-typography-blockquote\">\n<p><strong>.\u2009.\u2009. The discrepancy in the fallbacks opens up a potentially fascinating divergence between very front-end breakevens and CPI swaps<\/strong>. For example, consider the TII 0.625% Jan 26. This issue has a base CPI of 237.61129 and matures on January 15, 2026. Using the fallbacks above, the implied daily reference index for the TIPS at maturity would be (14\/30) * 325.604 + (16\/30) * 326.411 = 326.03445.3 Given that the maturity in years is c.0.22y, this implies an annualized breakeven inflation rate of (326.03445 \/ 323.82632) ^ (1 \/ 0.22) &#8211; 1 = 3.15%.<\/p>\n<p>By comparison, the ISDA fallback would imply (14\/30) * 325.174 + (16\/30) * 324.998 = 325.07999, which implies an annualized inflation swap rate of (325.07999 \/ 323.85626) ^ (1 \/ 0.22) &#8211; 1 = 1.76%.<\/p>\n<p><strong>This is a massive wedge between the TIPS breakeven and the matched-maturity CPI swap.<\/strong><\/p>\n<\/blockquote>\n<p>We\u2019ve still got a little bit of time, because TIPS and inflation swaps are indexed to the CPI with a lag \u2014 specifically, in the case of TIPS, a <a href=\"https:\/\/www.sciencedirect.com\/science\/article\/abs\/pii\/S1058330004000199\" data-trackable=\"link\">two-month lag<\/a>. This means, for example, the January 1st adjustment is actually based on the October CPI and that for February 1st is based on the November CPI. And, after a <a href=\"https:\/\/www.ft.com\/content\/c3e4ff02-538b-4886-8a6c-9806e1410e79\" data-trackable=\"link\">bit of kerfuffle<\/a>, the September CPI print <a href=\"https:\/\/www.ft.com\/content\/1d108859-6ad3-467e-84b6-d6c9f3480571\" data-trackable=\"link\">finally got published<\/a> last week. So the daily indexation schedule referenced by TIPS will run through the end of November. <\/p>\n<p>But after that we\u2019re in the land of the fallback. Annual US inflation rates could double or halve. But to TIPS holders the fallback will put them in the 3.2-3.7 per cent range. And to ISDA-beholden US inflation swap traders they\u2019ll forever be 3.01 per cent.<\/p>\n<\/div>\n\n<br \/><a href=\"https:\/\/www.ft.com\/content\/560eb4b6-5a91-4629-8f50-649f781595da\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this&hellip;\n","protected":false},"author":6,"featured_media":37457,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-37456","post","type-post","status-publish","format-standard","has-post-thumbnail","category-us","cs-entry","cs-video-wrap"],"_links":{"self":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/37456","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=37456"}],"version-history":[{"count":0,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/37456\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/media\/37457"}],"wp:attachment":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=37456"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=37456"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=37456"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}