The market is pricing in a 33% probability of a hike by the Bank of Canada in July and a 70% probability by October. The Fed just went ahead with another hike. And yet, market-driven measures of inflation expectations are sinking. The five-year breakeven rate is currently standing at 1.6%—down from close to 2% earlier in the year. In Canada, the reading is 1.1%—one of the lowest rates in any non-recessionary period and notably below the 1.5% rate seen in the winter.
And it’s not that central bankers don’t care. In December 2015 Fed Chair Yellen indicated that “convincing evidence that longer- term inflation expectations have moved lower would be of a concern…making the attainment of our 2 percent inflation goal more difficult”.