U.S. Inflation Expectations — 5-Year Breakeven Inflation Rate: anchored expectations amid late-cycle uncertainty
The 5-year breakeven inflation rate represents the market-implied average inflation expectation over the next five years, derived from the spread between nominal Treasury yields and inflation-protected securities (TIPS). As such, it provides a forward-looking measure of how investors price medium-term inflation risks and the credibility of monetary policy.
From early 2024 through early 2026, the 5-year breakeven rate fluctuated within a relatively contained range, generally between 2.0% and 2.6%. Despite periods of volatility, expectations remained broadly anchored and well below the inflation peaks observed earlier in the cycle.
Recent dynamics
During the first half of 2024, breakeven inflation rates declined from the mid-2% range toward levels closer to 2.0%, reflecting improving inflation data and growing confidence that disinflation was progressing. This phase coincided with easing headline inflation prints and reduced near-term inflation risk pricing.
From late 2024 into 2025, breakevens rebounded moderately, oscillating mostly between 2.3% and 2.5%. This rebound suggests that while markets remained confident inflation would not reaccelerate sharply, they continued to price persistent inflation risks above the Federal Reserve’s long-run target.
Interpretation and credibility signal
The stability of 5-year inflation expectations indicates that monetary policy has largely preserved its credibility. Markets do not appear to be pricing a loss of inflation control, even as inflation remains above target in realized terms and fiscal and geopolitical uncertainties persist.
At the same time, the tendency for breakevens to remain modestly above 2% suggests that investors view inflation risks as asymmetric. The dominant concern is not a renewed inflation surge, but rather a slow convergence process that leaves inflation slightly elevated for longer than in the pre-pandemic regime.
Interaction with rates and policy expectations
Movements in the 5-year breakeven rate interact closely with real yields and policy expectations. Periods of rising breakevens alongside elevated real rates point to inflation risk being priced without a significant easing of financial conditions, reinforcing a restrictive macro backdrop.
Conversely, the absence of a sustained breakout in breakevens places a constraint on long-term nominal yields and supports the view that recent increases in long-term rates have been driven more by term premia and real-rate dynamics than by unanchored inflation expectations.
Conclusion
The 5-year breakeven inflation rate points to a regime of anchored but cautious expectations. Markets continue to price medium-term inflation close to, but slightly above, the central bank’s objective.
The dominant signal is one of credibility rather than complacency. Inflation expectations remain contained, yet they reflect an environment in which disinflation is expected to proceed gradually and where upside inflation risks, while diminished, have not fully disappeared.