A key indicator of real-time, market-based inflation expectations is the spread between yields on Treasury Inflation Protected Securities, or TIPS, and yields on nominal Treasuries of similar maturity. The wider the spread, the more inflation fear is being priced into the market. If nominal 10-year Treasuries are yielding 4.57%, for instance, and 10-year TIPS are yielding 2.22%, the spread would be 235 basis points. That tells you the market is roughly expecting inflation to run at a 2.35% rate over the next several years.
The 10-year TIPS spread collapsed this summer and early fall, allowing Treasuries to rally. But that spread has been gradually widening out and today, it hit 235.33 bps. That's the highest since September 29. This isn't a big deal ... yet. But if this week's November Consumer Price Index report surprises to the upside, we could see TIPS spreads break to the upside as well.