In the data released by the University of Michigan last Friday, a small part of consumers' expectations for inflation is shocking, which has made some people concerned whether traders in the US Treasury market are underestimating the upside risk of prices.

According to the preliminary reading for October, consumers' average inflation expectations for the next 5 to 10 years is 7.1%, more than double the median of 3%. The average refers to the sum of a set of numbers divided by the quantity of numbers in the set, while the median refers to the middle number in a set of data.

However, Joanne Hsu, Consumer Surveys Director at the University of Michigan, has raised many warnings about interpreting the 7.1% average.

In an email to MarketWatch on Monday, she stated that the average reading of consumers' 5-10 year inflation rate expectations in October "was driven by a small part of consumers with very high inflation expectations", and the university's preferred measure of this inflation indicator "is the median, not the average". The preliminary median long-term inflation expectation for October dropped to 3%, lower than September's 3.1%. She said: "Since averages are highly sensitive to outliers, the final survey data on October 25 will provide a more meaningful average reading."

Nevertheless, despite last Friday's data and other observations, some market participants are still worried about the direction of inflation. According to the latest data from the St. Louis Fed, the Breakeven Inflation Rates (a measure of the market's expectations for the average inflation rate over the next 5 or 10 years) surged to their highest level since June or July last week. Some suggest this indicates increasing concerns about facing more enduring upward price risks.

Additionally, Jim Reid, a strategist at Deutsche Bank, stated that in the past five weeks, trading volume for 5-year inflation swap contracts used to hedge inflation risk exceeded any time since March 2023 before the collapse of Silicon Valley Bank.

Less than a month after Federal Reserve officials cut interest rates by 50 basis points and expressed more confidence that inflation is sustainably moving towards the 2% target, concerns about future price increases are intensifying.

Ben Emons, Chief Investment Officer and Founder of Washington FedWatch Advisors, stated that the increase in average inflation expectations may be partly related to concerns about the November 5th presidential election results and their potential impact on prices. In addition, he wrote in an email on Monday that government bond traders seem to severely underestimate the risk of soaring inflation.

Emons said: "Expectations for inflation surged before the election, which may reflect voters' concerns that prices could continue to rise regardless of who takes office. If this means the median inflation expectation continues to rise, inflation may make a comeback while government bond yields remain low."

The bond market was closed on Monday due to the Columbia Day holiday. As of last Friday, the yields on U.S. 10-year and 30-year Treasury bonds closed at 4.072% and 4.382%, respectively, rising by at least 40 basis points in the past four weeks. However, both are still largely below the fundamental levels before the 2007-09 financial crisis and recession.

What has driven the recent rise in U.S. Treasury yields are a series of economic data exceeding expectations, including the heavyweight September non-farm payroll report and the Institute for Supply Management (ISM) Services Index. The Consumer Price Index (CPI) for September also showed more stickiness than expected.

Investors have also been considering the possibility of escalating conflicts in the Middle East and the impact of China's economic stimulus measures on inflation. Others point out that both presidential candidates—Vice President Harris and former President Trump—have factors that could fuel inflation.

According to market commentary provided by the U.S. financial media Kobeissi Letter, it was posted online: "The sharp rise in prices of essential goods has severely hit consumer confidence, and consumers' expectations are becoming increasingly grim", "Inflation remains a major concern for Americans."

Editor/ping