Breaking Down US Inflation

Interpretation

The chart above displays the Headline Inflation Rate and the forward-looking 5-Year and 10-Year Breakeven Inflation Rates.
The headline inflation rate is defined as the yearly percentage change of the Consumer Price Index (CPI). When inflation is high, prices for goods and services rise and thus the purchasing power per unit of currency decreases. This is often linked to an increase in the money supply.
The breakeven inflation rate is a market-based measure of expected inflation derived from government bond yields. It's calculated by subtracting the yield of an inflation-protected bond from the yield of a nominal bond with the same maturity (also see The Real Interest Rate). It's called the "breakeven" rate because it represents the inflation rate at which an investor would theoretically receive the same return from holding either a nominal bond or an inflation-protected bond to maturity.
The breakeven rate differs from headline inflation in that it's forward-looking, representing market expectations of future inflation, while headline inflation measures the actually realized past price changes.

Data Sources

• Actual CPI Inflation Rate for the previous 12 months
  • Robert Shiller Online Data: CPI from 1871 until 1913
  • Federal Reserve Bank of St. Louis: CPI since 1913
• Federal Reserve Bank of St. Louis: 5-Year Breakeven Inflation Rate
• Federal Reserve Bank of St. Louis: 10-Year Breakeven Inflation Rate

Further Information

• Investopedia: What Is Headline Inflation (Reported in Consumer Price Index)?
• Bond Economics: What Is Breakeven Inflation?
• SmartAsset: What the Breakeven Inflation Rate Tells Investors
• LongtermTrends: The Real Interest Rate
• LongtermTrends: Large-cap vs. Small-cap Stocks