Five Year Inflation Breakeven, Estimated Expected Inflation, and Oil

Five year inflation breakevens have risen tightly with oil prices, while accounting for inflation and liquidity premia implies a more gradual albeit more steady increase in implied expected inflation.

Figure 1: Five year inflation breakeven, 5 year Treasury minus 5 year TIPS (blue, left scale), 5 year breakeven adjusted for both inflation risk and liquidity premia, per DKW (red, left scale), both in %, spot price of oil (Brent) (black, right scale) in $/bbl. Source: Treasury via FRED, KWW per DKW, EIA via FRED,, and author’s calculations.

The alternative calculations by KWW implies that inflation expectations have not surged as much as one might’ve thought — until the oil price increase starting in Q1.