What you're not hearing about inflation's dead canary in the coal mine

The 5-year 5 years forward TIPS breakeven spread has moved above the Fed's target in CPI terms for the first time since 2014. A tiny move above target is not, itself, evidence that expectations are unhinged. Oddly, the rise of the forward spread is the joint result if a rising 10-year breakeven and a falling 5-year breakeven. It's not clear what the target should be, considering that CPI is running 1.7% above PCE now, not the usual 0.5%. Expectations 10 years ago perfectly predicted today's inflation levels, but that's an anomaly in a terrible predictive track record. The pandemic-driven inflation in durable goods is already proving to be transitory. But now there is a second transitory Ukraine-driven inflation in commodities. At this point we are most worried that the Fed's attempt to show inflation-fighting resolved is being interpreted by markets as panic, and is actually inflaming expectations rather than anchoring them.