Inflation Is Hot Now, but Investors Are Betting That Won’t Last

Investors are betting the inflationary streak that has sent prices of everything from used cars to lumber soaring will fade in the coming years, a reassuring sign for markets struggling to find direction.

Few issues have vexed money managers more this year than inflation. As the global economy has regained its footing, prices for goods and services have risen—in many cases far faster than economists had anticipated. Labor shortages and supply-chain disruptions snarling the global shipping industry have added to inflationary pressures.

The trend has worried many investors, since inflation can chip into companies’ profit margins, pressuring share prices. It can also eat away at the purchasing power of government bonds’ fixed returns. In the days ahead, investors will get a look at fresh economic data including factory orders, vehicle sales and the monthly employment report.

Yet markets are starting to signal that investors may be growing less fearful.

Take the break-even rate. Calculated by measuring the difference in yields between Treasurys and their inflation-protected counterparts, or TIPS, the break-even rate shows how much inflation traders anticipate over a period of time. Since peaking for the year in May, the break-even rates for five-, seven-, and 10-year Treasurys have all fallen—suggesting traders are pricing in a moderation in inflation in coming years.