What Changed?
December’s CPI looks calm on the surface: inflation holds near the mid-2s, and the month-to-month drama is muted. Yet the market’s pricing of inflation risk tells a more nuanced story—one that often moves first and forces other assets to adjust.
The key shift is in how investors are weighting “near-term inflation surprises” versus “long-run inflation credibility.” Breakevens and inflation swaps don’t just summarize the latest print. They translate uncertainty into a live price—then feed directly into real yields, equity multiples, and credit spreads.
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The Numbers
CPI-U: +2.7% year over year (December 2025)
Core CPI (less food and energy): +2.6% year over year (December 2025)
5-year breakeven inflation: 2.45% (Jan. 26, 2026)
10-year breakeven inflation: 2.32% (Jan. 26, 2026)
5-year, 5-year forward inflation expectation rate: 2.19% (Jan. 26, 2026)
10-year term premium (Kim-Wright model): 0.6219% (Jan. 23, 2026)
Why It Matters
Breakevens are a simple spread—nominal Treasuries minus TIPS—but they carry a lot of information. When 5-year breakevens run above 10-year breakevens, as they do now, the market is effectively saying: inflation risk is more intense in the “here and now” than in the long run.
That matters because markets don’t wait for CPI confirmation. If near-term inflation compensation rises, real yields can tighten financial conditions even when the headline CPI trend looks steady. At the same time, a positive term premium means investors are demanding more compensation for holding duration risk—so long rates can stay firm even if long-run inflation expectations remain anchored.
Inflation swaps add another layer: they can be cleaner hedges for specific horizons, and research suggests they can be informative about one-year inflation expectations. In practice, swaps and breakevens can diverge when liquidity, hedging flows, or technical factors dominate—exactly the kind of “market plumbing” that won’t show up in a CPI table but will show up in asset prices.
Takeaway
CPI tells you what inflation was. Breakevens and swaps tell you what inflation risk costs right now—and that “price of risk” is often what moves portfolios first.
— Lauren
Editor, American Ledger
Resources
Bureau of Labor Statistics, January 2026
https://www.bls.gov/news.release/cpi.htm
Board of Governors of the Federal Reserve System, January 2026
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
U.S. Department of the Treasury (Tentative Auction Schedule), November 2025
https://home.treasury.gov/system/files/221/Tentative-Auction-Schedule.pdf
Board of Governors of the Federal Reserve System (FEDS Note: “The Swaps Strike Back”), 2023
https://www.federalreserve.gov/econres/feds/the-swaps-strike-back-evaluating-expectations-of-one-year-inflation.htm
