Knowledge has to be improved, challenged and increased constantly, or it vanishes. – Peter Drucker
Knowledge has to be improved, challenged and increased constantly, or it vanishes.
The sharp drop since September in U.S. zero-coupon inflation swaps, which reflect market-based expectations for average CPI inflation over a specified horizon, has attracted widespread attention for both its size and speed. At first glance, such a move might suggest weakening economic momentum or a loss of pricing power. The chart shows the front end of the inflation curve falling sharply while longer-dated expectations have moved far less.
The first major factor behind the decline is the scheduled rollover of tariff-related base effects. Tariff pass-through drove much of the goods inflation in 2025, and those effects are expected to fade after about a year. As they cycle out of the data, the tariff impulse is pulling measured inflation lower. Inflation swaps, especially at the one-year point, reflect this adjustment, pointing to the removal of an artificial inflation source rather than weaker demand.
A second driver is the evolving legal outlook for tariffs. Market participants have begun to price in the likelihood that the Supreme Court could curtail or invalidate several tariff provisions that have been central to the inflation narrative of recent years. Probability markets have shifted meaningfully, and the one-year inflation swap has followed almost one-for-one. This is less a growth signal and more a policy signal about the possible removal of tariff-driven inflation.
Energy prices are contributing as well. Crude oil prices are down more than 20% year-to-date, pulling near-term inflation expectations lower. The front end of the inflation swap curve has incorporated this decline.
The final and most debated factor is the quality of the latest Consumer Price Index (CPI) report, which matters because inflation swaps settle on CPI. The federal government shutdown canceled the October report and delayed the November release, creating gaps in the data. Economists have noted signs in the latest report that the U.S. Bureau of Labor Statistics carried forward prices at zero percent in several categories, including owners’ equivalent rent. The result is a CPI print that could be temporarily understated, prompting inflation swaps to reprice accordingly.
What does this imply? While the one-year swap has fallen the most, medium-term inflation expectations remain anchored in the mid-2s. One way to cut through the near-term volatility is to look at inflation expectations beyond the next 12 months. The one-year, one-year forward rate remains in the mid-2s and has barely moved. This stability suggests that investors see these drivers as temporary rather than indicative of a weakening economy.
In short, the broader picture points to normalization rather than deterioration. Tariff-related inflation is fading (and could recede further depending on the Supreme Court), energy prices have retrenched, and the CPI data has some measurement issues. These forces pull down the front end of the curve, but medium-term inflation expectations remain stable. The move is meaningful, but it speaks more to the normalization of near-term pricing than to any shift in the broader inflation trend.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
