RaboResearch said energy prices have continued to rise, yet U.S. and European
5y5y inflation expectations remain roughly anchored at central-bank targets. The
correlation between energy moves and long-term inflation pricing is weakening;
markets currently appear to trust central banks to keep long-term inflation
anchored. RaboResearch offers an alternative: long-term inflation expectations
may be shifting to reflect central-bank credibility, fiscal policy and
institutional risk more than short-term oil shocks. It highlights
fiscal-dominance risk — if markets doubt central-bank independence, long-term
inflation pricing could undergo a sudden, non-linear institutional repricing.
For markets, the current stable 5y5y supports policy credibility; but if energy
stays elevated and fiscal risks rise, whether long-end inflation expectations
and term premia remain muted will be the key watchpoint, and long-dated USTs’
reaction to oil/inflation shocks may better reveal if anchoring still holds than
monthly CPI prints.
