TL;DR: Consumer insights and market indicators show contradicting future inflation expectations. Here’s how to form your own.
Consumer inflation expectations are spiking: March 2025 data shows consumers predicted a 6.5% rise in prices over the next year, the highest since 1981. And they don’t expect this inflationary pain to be short-lived, anticipating a 4.4% annual inflation rate over the next five to 10 years, the highest since 1991.
This sharp rise has naturally captured headlines and sparked discussions about potential Fed policy shifts.
A Self-Fulfilling Prophecy
Inflation expectations aren’t just about measuring consumer sentiment–they can actually cause inflation to go up. If there’s an expectation that prices will go up in the future, workers may be more aggressive in wage negotiations, businesses may preemptively set higher prices, and consumers may accelerate purchases, increasing demand and pushing prices higher.
Troubling headlines from consumer surveys offer a grim outlook on what we might expect inflation to look like in the future, and while this is a powerful inflation indicator, investment markets paint a different picture, also worth considering.
Paying Attention to the Market: The TIPS Breakeven Rate
There’s a stark disconnect between recent consumer survey results and what's happening in the actual capital markets.
To understand market-based inflation expectations, the key indicator we need to examine is the "breakeven rate" - that’s the difference in yield between inflation-protected securities (TIPS) and nominal Treasury bonds with the same maturity.
In other words, this is what sophisticated market participants are willing to pay to hedge against inflation when opting for inflation-protected securities. If investors expect rampant inflation, this protection will be worth more to them, leading to an increase in the breakeven rate.
That’s what happened in 2022, when inflation was spiraling out of control. The breakeven rates for 5-Year and 10-Year Treasury notes, which represent market-based long-term inflation rates for the next 5 and 10 years, respectively, had reached levels as high as 3.5%.
Currently, even amid panicky consumer inflation expectations, they sit around 2.2-2.4%, not far from the Fed’s 2% inflation target and actually down from levels reached at the end of last year.
Why This Disconnect Matters
While consumer sentiment surveys can depend on emotional and anecdotal responses, market indicators offer concrete insights where participants are putting real money behind their inflation predictions.
By not rushing for long-term inflation protection, which would price TIPS at a premium, the breakeven rates we’re seeing today show that these market participants are betting any tariff-based inflation we may see is likely to be short-term.
For the Federal Reserve, this creates policy flexibility. As Fed Chairman Powell noted in recent comments, while "near-term inflation expectations have moved up significantly," the critical factor is that "longer-term inflation expectations appear to remain well anchored," with "market-based breakevens continuing to run close to 2 percent."
This distinction is what allows the Fed to consider rate cuts despite some contrary signals. They can look past short-term consumer perception spikes if the market's long-term inflation outlook remains stable.
Reading Through the Noise
As we enter a period of potential price increases due to tariff policy, it’s important to continue watching market-based measures of long-term inflation expectations that the Fed observes closely. At risk of being simplistic, we believe that at current levels, the Fed is at a yellow light, proceeding with caution. Movement towards 2% would get us to green, while 3% would be flashing red for the Fed.
As you navigate this complex economic environment, the ability to distinguish between various inflation signals becomes increasingly valuable. Looking beyond headline consumer survey numbers to understand the market's actual inflation pricing provides critical context.
So, next time consumer surveys come out with grim inflation expectations, take a look at the metrics officials at the Fed actually weigh into their policy decisions to help inform your own future outlook.
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