# Inflation Expectations

Source: https://www.yieldcurve.pro/learn/inflation-expectations

**Inflation expectations** are the market's forecast of future inflation rates. They are a critical component of nominal bond yields and a key input to monetary policy decisions.

Nominal yields can be decomposed as:

*Nominal yield = Real yield + Expected inflation + Inflation risk premium*

Two primary measures of inflation expectations:

- **Breakeven inflation rate**: the yield spread between a nominal Treasury and a [TIPS](https://www.yieldcurve.pro/learn/real-yield) of the same maturity. The 10-year breakeven reflects the market's expectation of average annual CPI inflation over the next decade.
- **Survey-based expectations**: the University of Michigan consumer survey and the New York Fed's Survey of Consumer Expectations track household inflation expectations.

Inflation expectations matter for the yield curve because:

- **Well-anchored expectations** (stable around 2%) allow the Fed to adjust policy without triggering self-fulfilling inflation spirals
- **Rising expectations** force the Fed to tighten, pushing up front-end yields and often flattening the curve
- **Falling expectations** (disinflation risk) allow the Fed to ease, typically steepening the curve

The blog post "Is Gold a Stock-Bond Diversifier?" explores how inflation expectations drive asset correlations — when inflation expectations rise, stocks and bonds tend to sell off together (positive correlation), breaking the diversification benefit that characterizes low-inflation environments.

The distinction between expected inflation and the **inflation risk premium** (extra compensation for inflation uncertainty) is important but hard to disentangle without a model.