The multi-decade trend in lower interest rates has been driven and sustained, in large part, by falling inflation. We expect inflation to continue to be moderate, a key pillar of our lower-for-longer interest rate outlook. Inflation will, however, need to be closely watched as the labor market continues to tighten, which could put upward pressure on wages.

Inflation expectations remain contained for now 2.5% 2.0% 1.5% 1.0% 3.5% 3.0% Source: Macrobond. INFLATION EXPECTATIONS REMAIN CONTAINED FOR NOW University of Michigan 5-year inflation expectations Government 5-year inflation break-even 2010 2017

We will be watching: Outside of the obvious, watching headline inflation measures like the Consumer Price Index, we will take cues from changes in inflation expectations. Inflation expectations can be measured through consumer surveys (like consumer confidence or the University of Michigan sentiment survey) or through market measures. While survey data show inflation expectations drifting lower, market measures of inflation expectations have recently increased, though they are still low by historic standards.

Risks to our view: The combination of a stronger-than-forecast rise in inflation and rising inflation expectations would signal that interest rates could move higher quickly as the Fed raises rates more aggressively to stem the build-up of inflationary pressure.

Next economic indicator: Global spreads >>

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