With RBA models showing that 10y breakeven inflation helps anchor underlying inflation, we have looked at he ability of a large range of economic and financial indicators to predict expected inflation. We found that breakeven inflation is very efficient, already capturing all the information in actual prices and wages, as well as consumer and RBA inflation forecasts. That said, the labour market, oil prices, overseas breakeven inflation and the exchange rate all led breakeven inflation. Combining the series that helped predict breakeven inflation in a single model, the two factors that ended up dominating were UK breakeven inflation and local unemployment. If overseas central banks successfully reflate their economies, this simple model points to tension between upward pressure from breakeven inflation abroad versus downward pressure locally from the end of the mining investment boom, although the larger influence of overseas breakeven inflation would likely win out.
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Barclays