Breakeven Inflation

The calculation is straightforward: take the yield on a conventional (nominal) government bond and subtract the yield on a same-maturity inflation-linked bond. The result is the breakeven inflation rate — the inflation level at which an investor would earn the same return from either bond. If actual inflation turns out higher than the breakeven, the inflation-linked bond wins; lower, and the nominal bond wins.

For example, suppose a 10-year Treasury yields 4.5% and the 10-year TIPS yields 1.8% (hypothetical figures). The 10-year breakeven inflation rate is 2.7%. That is the market's implied forecast: investors in aggregate are pricing in roughly 2.7% average annual inflation over the decade.

Central banks and economists watch breakeven rates closely because they reflect real-money expectations baked into bond prices, not just survey opinions. When breakevens rise sharply, it signals that bond markets expect inflation to stay elevated — which can influence central bank decisions on interest rates. When they fall, markets may be anticipating slower growth or disinflation. You can follow related yield data on the bonds page and economic releases on the economic calendar.

One important caveat: breakeven rates are not a pure inflation forecast. They include a liquidity premium — TIPS markets are generally less liquid than nominal Treasury markets — and can be distorted by heavy central-bank bond buying. Analysts typically treat them as a useful indicator rather than a precise prediction.