Break-even inflation rate

The break-even inflation rate is a metric used to estimate expected average inflation over a specific period. It is calculated by comparing the yields of nominal government bonds (which pay fixed interest) with inflation-protected bonds (which adjust payments for inflation). Essentially, it reflects investors’ expectations about average inflation; if actual inflation surpasses this rate, inflation-protected bonds would prove more valuable, and vice versa. This rate helps investors and policymakers gauge market sentiment about future inflation trends without making specific predictions, making it a useful tool in economic decision-making and investment planning.