U.S. inflation is at its highest level in 16 years

A gauge of U.S. inflation expectations for the next five years has soared to its highest level in more than 16 years, as investors factor in an increasing likelihood that price pressures will linger into next year.

The 5 year breakeven inflation rate was 2.77% as of Wednesday based on data from the Federal Reserve Bank of St. Louis. That s the highest level since April 2005, and up from a pandemic low of 0.16% in March 2020.

Traders and investors are focusing on inflation pressures in the run-up to the Federal Reserve meeting Nov. 2 - 3 in Washington because of the likelihood that incoming inflation readings will drift higher for the next few months. The consumer price index has risen for five straight months by 5% or more on a year-over-year basis, but seasonal adjustments to the September data may have made the 5.4% yearly pace appear lower than would otherwise be the case.

Accelerating inflation is likely to force the Fed to raise rates aggressively next year, said Jay Hatfield, founder and portfolio manager at Infrastructure Capital Advisors in New York. Hatfield said his firm sees a 50% chance of recession in 2022 and he expects to see high single-digit percentage increases in CPI readings through next year.

Rob Daly, director of fixed-income at Glenmede Investment Management in Philadelphia, says he s considering the possibility that inflation turns out to be punitive, but not necessarily durable. On Thursday, major U.S. stock indexes were rallying after consolidating earlier this week. The S&P 500 SPX, briefly traded above its record closing level, while Dow industrials DJIA fell by 0.4% or more than 100 points. The Nasdaq Composite Index traded higher by 0.3%.