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FALLING US INFLATION BREAKEVENS ARE A MIRAGE

ADMIN || 28th November 2025

US Inflation breakevens are falling, but this is as much about lower oil prices rather than a steep decline in CPI. Inflation may ease in the short-term weakness, but longer term it’s likely to remain steady or rise.

After a long hiatus, we’ll get new inflation data for November in a few weeks, after the October report was cancelled amid the government shutdown. Breakevens have dropped over the last couple of weeks but, as the chart below shows, the changes in oil prices and breakevens are tied at the hip pretty tightly.

There is a good reason for this. Commodity traders use oil as a hedge, and rising crude prices cause inflation traders to bid up TIPS, pushing real yields lower and breakevens higher. The recent fall in oil prices as hope rises of a peace deal between Russia and Ukraine therefore likely triggered the unwinding of some hedges.

Oil of course does have an impact on inflation, but modern economies, such as the US’s, have a lower passthrough as they are less energy intensive.

There is likely to be some moderation in inflation in the coming months. One potential source is falling shelter CPI – the single-biggest contributor to the headline index – as house and rental prices fall. CPI fixing swaps, which are one of the best short-term forecasts for inflation, anticipate that inflation should on net fall over the next 12 months.

As can be seen, the expected decline is modest, with a moderation of only 30 bps seen by August next year.

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