Wall Street inflation indicator surges to 4.62%, the inflation ghost has returned

Huitong Finance APP News — As the Middle East conflict deepens, a key indicator on Wall Street on Thursday reflects the inflation fears that the Trump administration least wants to see before the midterm elections.

With the expansion of U.S.-Israel military actions against Iran and disruptions in shipping through the Strait of Hormuz, market expectations for short-term price increases are approaching the average of about 5% during the Biden administration. Since taking office for a second term in January 2025, Trump has been vigorously promoting his substantial progress in reversing inflation, but Iran’s new Supreme Leader has vowed to continue blocking the key strait, causing oil prices to surge past $100 per barrel again, and inflation expectations to rise sharply.

One-year breakeven inflation rate surges to highest since June 2022

Bloomberg data shows that on Thursday, the one-year breakeven inflation rate, which reflects inflation expectations over the next year, jumped to 4.62%, the highest since June 2022, when CPI peaked at 9.1%. This indicator rapidly rose from 3.97% on March 2 (a few days after the large-scale U.S.-Israel airstrikes on Iran), and the two-year breakeven inflation rate increased to 3.18%, the highest since April last year, up significantly from 2.9% in early March.

The breakeven inflation rate is calculated as the difference between nominal U.S. Treasury yields and TIPS yields, aiming to measure market expectations for inflation over a given period. On Thursday, this indicator rose sharply in both the short and medium term, indicating that market concerns about sustained high oil prices have shifted from short-term shocks to more persistent inflation risks.

Retirement investors hit: short-term U.S. bond prices fall, yields rise

Lawrence Gillum, Chief Fixed Income Strategist at Charlotte LPL Financial, said that rising short-term inflation expectations pose problems for retirees or those nearing retirement who hold 1- and 2-year U.S. bonds. These bonds are popular for their cash-like characteristics, but falling prices and rising yields mean investors who buy later could have earned higher returns.

He added, “The volatility of the 1- and 2-year breakeven inflation rates is high and closely linked to oil prices. Currently, they are clearly ‘disanchored,’ indicating that markets remain highly worried about short-term inflation.” ‘Disanchored’ refers to inflation expectations becoming persistent and self-fulfilling, which could harm economic stability.

Longer-term breakeven inflation rates are also rising. According to FactSet data, the five-year breakeven inflation rate increased by 5 basis points to 2.58% on Thursday, further breaking above the psychological 2.5% level, often seen as a sign of market fears of sustained inflation.

Market outlook: oil prices unlikely to fall quickly, inflation pressures may become long-term

Tom Graff, Chief Investment Officer at Baltimore Facet, said, “The breakeven inflation rate indicates that the market believes oil prices will remain high for some time.” He added, “This is not a scenario where oil prices spike to $100 and then quickly fall back to $75. We are facing a prolonged impact, not a short-term retreat.”

If high inflation hampers the Federal Reserve from cutting rates from the current 3.5%-3.75% range, “it’s not good for anyone,” including stock investors.

On Thursday, the three major U.S. stock indexes fell sharply, with Brent crude surpassing $100 per barrel. The policy-sensitive 2-year Treasury yield jumped 12.6 basis points to nearly 3.76%, the largest single-day increase since May 2025. Traders currently see a 44.7% chance that the Fed will not cut rates this year.

Trump’s inflation reversal pledge faces tough test

Since taking office, Trump has repeatedly emphasized that his economic policies have significantly alleviated inflation pressures, but the historic oil supply disruptions caused by the Iran conflict are pushing inflation expectations back to late Biden-era levels. Markets worry that if oil prices and inflation remain high, it will undermine Trump’s energy policy credibility and amplify Democratic attacks ahead of the November midterm elections.

Next week’s Federal Reserve policy meeting (Tuesday and Wednesday local time) will face increased pressure, as officials must weigh the risks of rising inflation against slowing economic growth.

Overall, the escalation of the Middle East conflict has shifted inflation expectations from short-term shocks to systemic concerns. The one-year breakeven inflation rate has surged to 4.62%, and the five-year rate has broken above 2.5%, indicating growing fears of prolonged high oil prices and inflation becoming disanchored. The narrative of “inflation being under control,” promoted by the Trump administration, is now facing a severe reality test.

Investors should remain highly alert to next week’s Fed statement, oil price movements, and developments in the Middle East, as these factors will directly influence short-term monetary policy paths and asset prices. If inflation expectations further spiral out of control, the Fed’s room for easing will be greatly limited, and volatility in stocks and bonds could significantly increase.