The Biden administration and the Federal Reserve still expect inflation to cool down. Wall Street is starting to think they’re wrong.
Data out Friday confirmed Americans’ concerns: decade-high inflation still isn’t going away. The Personal Consumption Expenditures price index rose 0.3% in September and 4.4% year-over-year, hitting levels not seen since the Great Recession.
The latest inflation report butts heads with the outlook shared by the Fed and the White House throughout 2021. Both have said they expect high inflation to be transitory and cool off as the economy recovered.
But in the last days of October, bond investors made big bets that the Fed would raise interest rates earlier than expected, in what would amount to an admission that higher inflation was at risk of turning permanent. As traders dumped short-duration bonds and bought long-term government debt, the difference between the two-year and the 10-year Treasury yields — also known as the yield curve — flattened the most since the summer of 2020, when inflation first started surging.