Recent developments in US financial markets are painting an increasingly clear picture of rising inflation expectations, a phenomenon we might call ‘Trumpflation’. T

he evidence is mounting across various market indicators, suggesting we may be transitioning from a ‘goldilocks’ economy towards a more stagflationary scenario.

American consumers’ inflation expectations have risen sharply in January and February, and we’re observing clear signs of both businesses and consumers stockpiling goods in anticipation of potential future tariffs. This behavioural shift is accompanied by notable increases in US food prices and global commodity prices, particularly gold – traditional indicators of rising inflation expectations.

While bond markets initially seemed somewhat immune to these inflation fears, this is now changing significantly.

Looking at market-based measures of inflation expectations, the picture becomes quite telling. The 5-year breakeven inflation rate (reflecting market expectations for CPI inflation over the next five years) has been trending decisively upward since the turn of the year.

Meanwhile, the 5-year, 5-year forward inflation expectation rate (measuring expected inflation for the five-year period beginning five years from now) has remained relatively stable near the Federal Reserve’s 2% target since Trump’s election in November.

Particularly noteworthy is the dollar’s recent behaviour. Counter to what one might expect given the substantial tariff increases, the US dollar has actually weakened over the past month.

This development, despite relatively high US interest rates compared to Japanese or European rates, suggests investors are beginning to withdraw from US bond and equity markets – another indication of growing inflation concerns.

The dollar, which still appears significantly overvalued, continues to face downward pressure.

The shift in market sentiment is further evidenced by the underperformance of US equities relative to European stocks over the past month. This marks a significant departure from the initial Trump-era optimism, when markets focused on the administration’s deregulation agenda and its potential to boost growth without stoking inflation.

We appear to be witnessing the evaporation of this early optimism. While the transition from ‘goldilocks’ to stagflation isn’t yet dramatic, the trend is becoming increasingly clear.

The markets are signalling that the combination of trade tensions, increasing worries US federal debt, and monetary policy may be creating a more inflationary environment than initially anticipated.

The Federal Reserve will find it increasingly difficult to dismiss these signals as temporary noise, particularly given the broader context of economic developments.

The confluence of rising inflation expectations, weakening dollar, and shifting market dynamics suggests we may be entering a new phase in the economic cycle – one that requires careful attention from policymakers and market participants alike.