What Drives Inflation Expectations? Gas Prices or Trump?

General consensus seems to have quickly moved to a view that a Trump administration is going to be inflationary for the US and the global economy. Bonds have sold off and Bloomberg has reported that over $1 trillion worth of bond market value has been wiped out this week alone. 10-year breakeven inflation has widened out by 20 bps since 11/4. 30-year breakeven inflation has widened by 25 bps and 5-year, 5-year forward breakeven inflation has widened out by 24 bps over the past week as well. These are some of the largest moves in several years as the last time we saw a 1-week change in 10-year breakeven inflation this large was in 2012. The question we are asking ourselves today is whether or not this is truly a new trend change in inflation expectations?

One of, if not the highest, correlated series to inflation expectations is gasoline prices. For example, since 2008 gas prices and 10-year breakeven inflation has had an 84% correlation. This is a slightly higher correlation than oil prices have had with breakeven inflation. Since 2008. oil prices and 10-year breakeven inflation has had an 80% correlation. Gas prices and 30-year breakeven inflation has had an 84% correlation since 2010 and 5-year-, 5-year forward inflation expectations has had a 77% correlation since 2007. So what is confusing us at the moment is that gas prices are actually turning over while inflation expectations have shot higher. And we believe there is a compelling case to be made that gas prices could fall further and this is not even considering the fact that the Trump administration could spur further shale oil investments by deregulating parts of the energy industry which would only add to the supply/demand imbalance that already exists.