Why are 5-year Inflation Expectations declining so much?

Comments are requested for this post. Please give your opinions below…

Looking out 5 years from now, what average inflation rate is the market perceiving? (link to graph)

inf ex

The market’s perception of inflation over the next 5 years has declined to near 1.5%. Why are 5-year inflation expectations steadily dropping so much?

  • Is it oil prices 5 years from now? Will oil prices decline further over the next 5 years? Will China’s demand for oil fall?
  • Is it Europe looking to fall into a Japan type deflation?
  • Is it central banks keeping interest rates low for an extended period of time? Is it the Fisher Effect causing the real rate to move to its natural rate over time? Is it that if the natural real rate is 2%, and central bank rates stay below 1%, we might eventually see deflation to bring real rates up to their natural level of 2%?
  • Is it a view that yields will stay low and that inflation will have to be low so as not to eat into yields?
  • Is it uncertainty about a recession that would drive inflation down?
  • or is it something else?