Investors have become increasingly worried about the inflation outlook. 10-year break-even rates (which reflect expectations for RPI inflation) have risen to 3.4% – their highest rate since September 2008. While this partly reflects investors pricing in the inflationary consequences of the pound’s recent drop, since the start of the year break-even rates have risen all along the curve. As a result, the rise in inflation expectations also seems to reflect the belief that the MPC will tolerate high inflation for a prolonged period. Nonetheless, we continue to think that concerns about the medium-term outlook for inflation are overdone and believe that the large amount of slack in the economy will keep a lid on underlying price pressures.
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