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Market Extra: Five-year U.S. inflation gauge hits highest level since 2005

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 at 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 runup to the Federal Reserve’s Nov. 2-3 meeting in Washington because of the likelihood that incoming inflation readings will drift higher for the next few months. The consumer price index has risen by 5% or more on a year-over-year basis for five straight months, 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 a 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 “durable,” but not necessarily “punitive.”

On Thursday, major U.S. stock indexes were consolidating after rallying earlier this week. The S&P 500
SPX,
-0.03%

briefly traded above its record closing level, while Dow industrials
DJIA,
-0.33%

fell by 0.4% or more than 100 points. The Nasdaq Composite Index
COMP,
+0.34%

traded higher by 0.3%.

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