TIPS and Breakeven Inflation Rates: A Reliable Measure of Future Inflation Expectations

The MarketWatch article opens with Yogi Berra’s quote to emphasize the well-documented unreliability of Wall Street forecasts due to market complexity and unexpected events [1]. It then positions Treasury Inflation-Protected Securities (TIPS) as an inflation-fighting investment: TIPS are U.S. government bonds whose principal adjusts with changes in the Consumer Price Index (CPI), ensuring investors maintain purchasing power [0].

A core argument is that TIPS can signal future inflation through the breakeven inflation rate, calculated as the yield difference between nominal Treasury bonds and TIPS of the same maturity [0][2]. This rate reflects market expectations for inflation over the bond’s term. A specific focus is the 5-year, 5-year forward inflation expectation rate (expected inflation for the 5-year period starting 5 years from now), valued for its ability to filter out near-term volatility [0][3]. As of December 4, 2025, this rate was ~2.23% [2], aligning closely with the Federal Reserve’s 2% inflation target, indicating market confidence in long-term inflation stability.

1. Unlike subjective analyst forecasts, breakeven inflation rates are derived from actual market transactions, making them a more objective indicator of inflation expectations.
2. The 5-year, 5-year forward rate is a preferred metric for the Fed and economists because it minimizes short-term noise (e.g., supply shocks, temporary policy shifts) [3].
3. TIPS provide a low-risk (U.S. government-backed) mechanism to hedge inflation, addressing a critical concern for investors in uncertain price-growth environments.

• Opportunities
  : TIPS offer a reliable inflation hedge for risk-averse investors, while the current forward rate near the Fed’s target may signal a stable inflation environment supporting long-term planning.
• Risks
  : If actual inflation is lower than breakeven expectations, TIPS may underperform nominal Treasuries. TIPS prices are also sensitive to rising interest rates, which could reduce their market value. While objective, the breakeven rate remains an expectation, not a guaranteed prediction.

• TIPS are issued by the U.S. Treasury with maturities of 5, 10, and 30 years, with principal adjusted for CPI inflation [0].
• The breakeven inflation rate compares nominal and TIPS yields to gauge market inflation expectations [0][2].
• The 5-year, 5-year forward inflation expectation rate (~2.23% as of December 4, 2025) is a long-term indicator used by policymakers [2][3].