President Trump said the ceasefire with Iran is on “massive life support,” which suggests that inflation risk will remain elevated.
Oil prices continue to trade above $100 a barrel for the US crude benchmark as Trump has become increasingly frustrated with Iran’s negotiating positions to formally end the conflict that is keeping Gulf energy exports blocked. This disruption is keeping prices high and driving up headline measures of inflation. With no clear exit strategy on the horizon, markets are pricing in higher odds of persistent inflation.
One metric to watch is the ratio of the iShares TIPS Bond ETF (TIP), a portfolio of inflation‑indexed Treasuries, to a similar fund that holds conventional government bonds (IEF). As this ratio rises, it implies that the market is demanding a higher inflation premium. Notably, the ratio is trading near the peaks of recent years. A decisive break above this level (red line in the chart below) would signal stronger concern that inflation risk could run longer and higher than recently expected.
Today’s April report on consumer prices is expected to highlight another month of hotter inflation. The Cleveland Fed’s current inflation nowcast indicates that the rise in headline CPI will continue through May.
Betting markets are pricing in higher odds that inflation will top 4% this year, substantially higher than the 3.3% year‑over‑year trend reported for headline CPI through March.
The Treasury market’s implied inflation forecast is also near multi‑year highs, based on the spread between inflation‑indexed yields and their nominal counterparts. The 5‑year forecast is 2.67% as of May 11, just below last week’s 2.72% peak. A sustained push above that peak would highlight the market’s growing confidence that inflation risk will persist.
Perhaps the final straw in the repricing of inflation risk will be rising expectations that the Federal Reserve will increase interest rates to combat the shift. For now, that remains a low‑probability scenario based on Fed funds futures, which continue to price in high odds that the central bank will leave its target rate unchanged for the next several policy meetings.
That view may persist if core readings of inflation remain relatively stable, as they have recently. These measures of pricing pressure tend to hold more sway at the Fed. But the longer the Middle East conflict continues and energy exports remain blocked, the higher the odds that the status quo for Fed expectations will give way to a hawkish pivot. A sign that this shift is gaining momentum: core inflation continues to edge higher.
