Although I have not been attempting to do economic forecasts, the current environment is surprising to me, at least with regards to inflation. The above figure shows the 5-year breakeven inflation rate as based on the U.S. inflation-indexed bond (TIPS) market.
The 5-year breakeven inflation rate is the 5-year conventional bond rate (“nominal yield”) minus the quoted yield (“real yield”) on a 5-year inflation-indexed bond. This difference (shown above) is the rate of inflation required over the next 5 years for the two bonds to have the same rate of return. (Hence, the TIPS breaks even with the conventional bond.) The above series are from the Federal Reserve H.15 Report, which are fitted yields, and so there can be gaps between the measure above and better-measured breakeven rates for particular bonds. However, the gap between this measure and “physical bonds” are unlikely to be too large at the 5-year tenor.
Although the breakeven rate has risen slightly, it is nowhere near the levels seen post-pandemic and the (renewed) Russian invasion of Ukraine. Of course, it is above the levels of the 2010s, where the economy was mired in excess capacity. The current disruptions represent a one-time shock, so the inflationary impact should mainly show up in shorter tenors like the 5-year. Since we have little basis to make inflation point forecasts four years out (for example), we need to assume that inflation will revert to some form of long-term average, which something like a 30-year breakeven should represent.
It may be that markets are too complacent about the situation in the Persian Gulf. At the time of writing, there has been another breakout of peace optimism. That said, it looks like Asia and Africa are facing the brunt of the oil price shock. Their demand is being destroyed the fastest, which buffers the rest of the world.
Nevertheless, my concern was not just oil prices, but the supply chain disruptions that downstream of the cutting of commodity flows out of the Gulf. Those disruptions would take months to show up. However, these other price shocks will be focussed on physical production, and so will have less effects on services-heavy economies.
My writing has faced a few recent distractions, and it looks like I may be travelling some time soon. It is likely that my output will be focussed on getting my inflation book finalised. It was in fairly good shape, although I was updating charts, and adjusting text to account for the economic convulsions courtesy of the White House.
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(c) Brian Romanchuk 2026
