After a storm comes a calm. — Matthew Henry
After a storm comes a calm.
Oil shocks move quickly through markets. Inflation expectations follow these shocks. The initial moves draw most of the attention, but the more important question is how much of the shock investors expect to persist once the first reaction fades.
The one-year inflation swap reflects the inflation rate investors expect over the next twelve months. The one-year, one-year forward inflation rate, usually shortened to 1y1y, reflects expected inflation in the twelve months after that, roughly the 12-to-24-month window. One captures the immediate inflation shock. The other captures how much of that shock investors expect to carry into the future.
The Iran war and shipping disruption through the Strait of Hormuz pushed energy markets sharply higher and revived near-term inflation concerns. Oil, gasoline, freight, and insurance costs all feed directly into the next few quarters, and the one-year inflation swap moved accordingly. The 1y1y forward rate has remained much more contained. Since the February 27 close, the 1-year inflation swap has risen 62 basis points, while the 1y1y inflation forward rate has risen only 18 basis points.
Crude is showing the same front-loaded repricing. Since the February 27 close, front-month WTI has risen from $67.02 to $97.39, a 45.3% increase, while the sixth contract has risen from $65.15 to $75.99, up only 16.6%. The front of the curve has moved far more than the back, much like the one-year inflation swap relative to the 1y1y forward rate.
Last year’s tariff episode showed a similar pattern. Tariffs lifted near-term inflation expectations as investors priced in higher goods costs and a fresh round of pass-through risk. The 12-to-24-month window stayed much calmer. Markets treated that episode as an acute inflation shock with limited evidence of a broader change in the medium-term inflation outlook. The current Iran and Hormuz shock is following a similar pattern so far. Front-year inflation pricing has reacted sharply, while the second-year window has yet to move in the same way.
Policymakers can usually tolerate some short-term inflation volatility tied to energy if medium-term expectations remain relatively stable. The March 2026 FOMC minutes pointed in the same direction, noting that the one-year inflation swap rose sharply while “forward measures of inflation compensation at horizons beyond one year were little changed.” That backdrop can leave room for the Fed to remain on hold even as near-term inflation concerns increase. A materially higher 1y1y forward rate would put pressure on the Fed to tighten. The market would be signaling that inflation pressure is beginning to spread beyond the immediate shock window.
A higher 1y1y inflation forward rate would push front-end yields higher as hikes begin to enter the conversation, while equity markets would feel it through discount rate and a harsher read on inflation persistence. Duration-sensitive parts of the market would be especially exposed. Spot oil captures the immediate shock. The 1y1y inflation forward rate gives a cleaner read on what the market expects to remain after that first wave passes.
Headlines around truces, violations, de-escalation, and renewed escalation change by the hour. Pricing across the inflation curve offers a clearer read. A sustained rise in 1y1y would change the market message quickly. Near-term inflation fears have clearly risen. Inflation expectations in the following year remain much more contained. A move in that second-year window would force markets to think less about the size of the shock and more about its staying power.
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.
