Market-based inflation expectations have two components: on the one hand, a long-term, adaptive (or backward looking) component, which is linked to the perceived (or cyclically-adjusted) rate of inflation and, on the other hand, a short-term, rational (or forward-looking) component, which can be proxied mainly by the ISM employment index and secondarily by the oil price. As the adaptive component exhibits some inertia, it holds both the rational component and inflation expectations on the leash.

At their current level, which is close to fair value, inflation expectations no longer present investors with any kind of safe bet. For this to happen again, transient cyclical forces must first pull them away from fair value.

As the cyclically-adjusted rate of inflation is currently rather inelastic, it would take quite a dramatic and persistent inflation surprise to have a material, structural impact on market-based inflation expectations. Given the current low elasticity of the anchor of market-based inflation expectations and the stability of core inflation expectations, any tightening of monetary policy is likely to be cautious.