Expectations about inflation are an important indicator of actual future inflation: If market participants expect inflation to be higher, they may elevate prices, increasing the actual inflation rate and creating a self-fulfilling prophecy. In this FRED Blog post, we compare “breakeven” inflation expectations with actual inflation to see how they’ve both evolved over time.

The FRED graph above shows 5-year (medium-term) and 30-year (long-term) breakeven inflation rates, along with the consumer price index (CPI), which measures actual inflation in the economy.

The breakeven inflation rate is the difference in yields between a standard Treasury security, which specifies payments in nominal terms, and an inflation-protected Treasury security (or TIPS), which adjusts its principal with inflation. This difference is a common representation of what markets expect inflation to be in the future—here, after 5 years and 30 years.

Before the COVID recession, the 5-year breakeven inflation rate was generally lower than its 30-year equivalent: Households expected that inflation would be higher in the longer term than the medium term or that current inflation was below the long-term trend. During this period, inflation was frequently below the Fed’s 2% inflation target.

During the period of high inflation in 2021-2022, medium-term inflation expectations were higher than long-term expectations, which may mean that markets believed inflation was higher than the long-term trend and would fall in the coming years.

This belief seems to have been validated, as inflation has since dropped. And, since 2023, medium-term and long-term inflation expectations have started to converge: Markets believe average inflation over the next 5 years will be similar to the average inflation over the next 30 years.

How this graph was created: Search FRED for and select “5-Year Breakeven Inflation Rate (T5YIE).” From the “Edit Graph” panel, under “Modify Frequency,” select “Monthly” and make sure “Aggregation Method” is “Average.” Use the “Add Line” tab to search for and select “30-year Breakeven Inflation Rate (T30YIEM)” and again to search for and select “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average (CPIAUCSL).” Under “Units,” select “Percent Change from Year Ago.” Select the time period 2015-02-01 to 2025-02-01. Use the “Format” tab to scroll down to Line 1 and Line 2, click the plus symbol next to the “Customize” bar, and under “Line style” select “Solid.” For Line 3, under “Line Style” select “Dot” and under “Color” type #666360.

Suggested by Yu-Ting Chiang and Mick Dueholm.