Inflation Expectations in Europe Rise to Highest Level in Over a Year
By Anna Hirtenstein
European inflation expectations are rising as investors
anticipate ongoing easy monetary policy and a global economic
rebound boosted by U.S. fiscal spending.
The closely watched 5-year 5-year forward inflation swap rate
for the euro area rose above 1.35% Tuesday, the highest in over a
year. It continued to hover near that level Wednesday. The metric
shows an average expectation for price increases over five
"This is quite a remarkable move, it has surprised us," said
Jorge Garayo, a rates and inflation strategist at Société
Forecasts for higher prices are playing out in the bond market.
Germany's 10-year break-even rate, or the difference in yield
between its benchmark bond and a price level-linked bond, climbed
above 1% for the first time since February. Italy's equivalent rate
hit a more-than two-year high. Essentially, a higher break-even
rate suggests investors expect prices to rise faster.
"With the onset of vaccines, people are upgrading their growth
outlooks, " said UBS rates strategist Rohan Khanna.
Inflation is closely tracked by investors because it impacts the
valuation of financial products -- particularly bonds, which lose
out if prices rise too fast because their payouts are typically
fixed. Inflation often comes in below expectations in much of the
Eurozone inflation turned negative in 2020 as the region's
economy was battered by the pandemic and intermittent lockdowns.
The headline inflation rate stood at minus 0.3% in November, at
which level it is expected to remain December.
The European Central Bank targets annual inflation of just below
2%, but has missed the mark for most of the past decade. It cut
some of its projections at its last monetary policy meeting in
On Tuesday, ECB policy maker Isabel Schnabel told Der Standard
newspaper that the central bank wouldn't act on short-term price
rises, which could potentially be seen in more expensive travel and
dining after lockdowns are lifted due to pent-up demand. This
allayed investors' concerns that the central bank could consider
tapering its accommodative measures soon, Mr. Khanna said.
Another ECB official, Philip Lane], recently echoed the views of
Federal Reserve Chairman Jerome Powell, who shifted to average
inflation targeting in August, meaning inflation in the U.S. can
rise above 2% without moves to immediately rein it back in.
Breakevens have been climbing across the Atlantic. The U.S.
10-year rate has been above 2% since the start of 2021. The yield
on the 10-year Treasury note rose above 1% on Jan. 6 for the first
time since March.
On Wednesday, the Labor Department said the consumer-price index
rose 1.4% in the year ended December, the smallest increase since
2015 due to the economic downturn. But the Democrats' wins in the
Georgia runoff elections are expected to result in higher levels of
fiscal spending, and in turn more economic growth and a boost to
Expectations for higher spending in the U.S. are impacting
markets in Europe, according to Mr. Garayo. A rebound in the
world's biggest economy would boost European growth and
"The U.S. and the reflation story, this will drive expectations
of better news for the economy," he said, but added that for the
rally to continue, European inflation data would need to
Write to Anna Hirtenstein at firstname.lastname@example.org
(END) Dow Jones Newswires
January 13, 2021 12:04 ET (17:04 GMT)
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