Home Markets Analysis: On inflation, central bankers shouldn’t take market’s word for it

Analysis: On inflation, central bankers shouldn’t take market’s word for it

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Bank notes of different currencies, including Euro, U.S. Dollar, Turkish Lira or Brazilian Reais, are photographed in Frankfurt, Germany, in this illustration picture taken May 7, 2017. REUTERS/Kai Pfaffenbach/Illustration

  • 5y5y inflation measure has undue correlation with oil prices
  • Central banks look for alternative indicators

FRANKFURT, Nov 1 (Reuters) – Investors are pricing in the briskest inflation rates in decades for the United States and the euro zone but central bankers may be well advised to take that with a pinch of salt given flaws in the indicator.

The so-called five-year/five-year forward gauge of market inflation expectations – or 5y5y for short – has hit 2% in the euro zone and its U.S. counterpart is even above that threshold, which is the Federal Reserve’s and the European Central Bank’s goal.

So should both central banks just declare victory and begin raising rates?

Not so fast.

Both indicators, which roughly measure how much compensation…

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