Key Inflation Indicator Jumps to Near Four-Year High! Is Trump's Concern Coming True?

Source: Jin10 Data

The Middle East conflict ignites inflation fears, causing markets to completely “de-anchor”! Trump’s proud achievement of reducing inflation is now facing its biggest crisis ahead of the midterm elections.

As the conflict in the Middle East intensifies further on Thursday, an important indicator on Wall Street reflected growing inflation concerns, which the Trump administration has been eager to avoid before the midterm elections.

Since beginning his second term in January 2025, Trump has touted his ability to make significant progress in reversing inflation. However, the current Middle East conflict is triggering the largest-ever disruption of oil supplies, with Iran’s new supreme leader expected to continue closing key waterways. As a result, market expectations for short-term price increases are approaching an average of about 5%, a level that was common during the Biden administration. Previously, Biden faced widespread criticism for allowing inflation to return to a 40-year high in 2022.

According to Bloomberg, the measure of inflation expectations over the next year (the 1-year breakeven inflation rate) jumped to 4.62% on Thursday. This is the highest level since June 2022, when the CPI annual rate peaked at 9.1%. In the days following the large-scale U.S.-Israel airstrikes on Iran on March 2, the 1-year breakeven rate has risen steadily from 3.97%. Meanwhile, the 2-year breakeven rate increased to 3.18%, reaching a new high since April last year, up from 2.9% in early March.

The breakeven rate aims to measure the inflation level at which holding nominal government bonds and inflation-protected securities (TIPS) yields are equal. It is calculated as the difference between the nominal Treasury yield and the yield on inflation-linked securities with the same maturity.

Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, said that the rise in short-term inflation expectations poses problems for investors who are already retired or nearing retirement. These investors hold assets with durations similar to one- and two-year Treasuries, but now these bonds are declining in price and yields are rising, meaning investors waiting to buy again could get higher interest rates.

In a phone interview, Gillum pointed out that the 1- and 2-year breakeven inflation rates, which usually fluctuate with oil prices, have now “definitely become de-anchored,” indicating that the market remains uneasy about short-term inflation. “De-anchoring” refers to the risk that expectations for future price increases become persistent and self-fulfilling, which could harm economic stability.

Longer-term breakeven inflation rates are also rising. FactSet data shows that the five-year breakeven rate increased by 5 basis points to 2.58% on Friday, further breaking above the 2.5% threshold, signaling a greater risk of sustained inflation.

Tom Graff, Investment Officer at financial advisory firm Facet, believes that the breakeven rate indicates the market expects oil prices to stay high for some time. This is not a scenario where oil prices spike to $100 and then fall back to $75; we are facing a situation that will not disappear quickly.

Graff added that if high inflation hampers the Federal Reserve’s ability to cut interest rates from the current 3.5% to 3.75%, then all parties, including stock investors, will face a tough situation.

Following the global Brent crude oil price surpassing $100 per barrel, the three major U.S. stock indexes all closed sharply lower on Thursday. The policy-sensitive 2-year Treasury yield jumped 12.6 basis points to nearly 3.76%, the largest single-day increase since May 2025. The outcome of the Federal Reserve meeting will be announced next Wednesday, and traders currently see a 44.7% chance that the Fed will not cut rates this year.

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