The key market gauge of long-term euro area inflation expectations hits a fresh seven-year high, exceeding the ECB’s target
The gauge jumps up to 2.028%, its highest since September 2014, and continues to reaffirm that the bond market is still perceiving price pressures to keep higher in the months ahead amid surging energy prices and supply chain disruptions.
This is where things will start to get interesting for the ECB as they now define the inflation target at 2% following their strategy review this year, with perhaps some wiggle room for a brief overshoot (though not all policymakers are in agreement with that).
But as inflation expectations creep higher, this could breed more fear that there would be spillovers to yields and what that implies about financial conditions in general.
With regards to the former, nominal yields in the region are on the rise but real yields have instead declined to near record lows – underscoring inflation fears or worries of a more sombre economic outlook in the months to come.