An Economist Says Inflation Is About to Become ‘Yesterday’s Story’ — Here’s the One Number He’s Watching

Steve Moore appeared on Kudlow Thursday night and argued that the five-year break-even inflation rate, the bond market’s cleanest read on where prices are heading, had collapsed. “It’s now at 2.2%, Larry. A month ago it was well over 3.5%,” Moore told Larry Kudlow on Fox Business. He credited Fed Chair Kevin Warsh’s messaging on price stability with anchoring expectations almost overnight. His thesis is simple: inflation is about to become yesterday’s story, and the bond market is already pricing it.

That was a big swing in a short window. The question for anyone watching mortgage rates, Treasury yields, or the Fed’s next move is whether the market truly agrees with Moore, or whether he was reading the tea leaves a little hot. Events since his appearance have added real complexity to the picture, and the data trail is worth walking through carefully.

The one number that matters

The five-year break-even is the difference between the nominal five-year Treasury yield and the five-year TIPS yield. It represents the market’s bet on average inflation over the next half decade, and Moore is right that it ranks among the cleanest single reads available. “That is the best market prediction of where inflation is headed,” he said.

When Moore spoke, the reading sat at 1.92% as of June 25, with an intra-month range of 1.64% to 2.03%. That was a world below the 3.5% he said prevailed a month earlier. The directional story Moore told held up in the short run, but the rate did not stay in the low-1.9% range for long. By July it had edged back to around 2.16%, and by early September the five-year break-even had climbed further to 2.47%, according to Federal Reserve data. The bond market is still pricing in far less inflation than it was at the start of the year, but the rapid compression Moore described has partially reversed.

The ten-year Treasury yield has moved in the same direction, and not in a way that flatters the disinflationary thesis. It stood at roughly 4.4% on June 25, climbed to around 4.66% by late July, and then surged to 4.818% on September 2 — its highest level since November 2023 — before pulling back slightly to 4.79% by September 4. Persistent inflation fears and heavy Treasury issuance have kept upward pressure on long-end yields even as Moore’s call gained some short-term validation.

What the actual inflation prints are doing

The awkward wrinkle Moore acknowledged was that realized inflation had not gotten the memo when he spoke. At that point, headline PCE had come in at roughly 4.1% year over year in May 2026, up sharply from 2.8% in February. Core PCE was running near 3.4%.

The June 2026 PCE report, released after Moore’s appearance, offered partial vindication. Headline PCE eased to 3.7% year over year, down from May’s 4.1% pace, driven by a drop in energy prices tied to a brief Iran ceasefire. Core PCE edged down to 3.3%. Services prices rose 2.3% year over year in June, a notable deceleration from the 3.5% to 3.8% range the sector had been stuck in.

The July 2026 PCE report, released on August 26, showed that progress has since stalled. Headline PCE held at 3.7% year over year for a second consecutive month, while core PCE also held at 3.3%. The month-over-month PCE reading came in at 0.2%, one tick above the 0.1% economists had expected. Real consumer spending was flat in July after a 0.4% gain in June, as higher prices and cautious sentiment weighed on households. Personal income grew a solid 0.4%, helping push the saving rate back up to 3% from June’s four-year low of 2.6%. Moore’s argument that energy would pull the headline number lower played out in June, but July offered no further relief, and the Iran truce that helped drive the June decline has since collapsed.

The durable goods tell

Financial journalist John Carney flagged broad-based industrial strength during the same broadcast. “Machinery was really strong. Primary metals up 3%. That is people investing in America,” he said.

Consumer spending data available at the time backed that picture. Durable goods PCE climbed to $2,374.4 billion (annualized) in May 2026, up from $2,247.0 billion a year earlier. Recreational goods alone moved from $690.0 billion to $760.7 billion year over year. Total PCE punched through $22 trillion at an annualized rate. The June report’s 0.3% monthly spending gain added to that momentum, even though income grew only 0.2% that month. By July, the picture had cooled: real spending went flat, a sharp reversal that suggests the consumer may finally be feeling the weight of prices that have stayed well above the Fed’s 2% target for more than a year.

What to watch next

Moore’s most consequential claim was on the policy side. “The Fed’s not going to raise rates at all. Inflation is going away quite rapidly,” he said. That call has since run into real-world friction at every turn.

The Federal Reserve held its benchmark rate steady at 3.5% to 3.75% at the late-July meeting, as expected, but three officials dissented in favor of an immediate quarter-point increase. Those dissents came from Beth Hammack of the Cleveland Fed, Neel Kashkari of the Minneapolis Fed, and Lorie Logan of the Dallas Fed, a lineup that made clear the hawkish wing of the committee was not satisfied with standing pat. The Fed’s June dot plot had already shown nine members projecting at least one hike in 2026.

The September meeting, scheduled for September 15-16, has become the focal point for rate-hike bets. Futures markets initially put odds of a September hike as high as 65% in late July, before a weak July jobs report cooled expectations. Nonfarm payrolls fell an unexpected 23,000 in July, dragged down by a loss of 53,000 government positions. Prior months were also revised sharply lower, with May and June combined coming in 103,000 below earlier estimates. That soft patch pulled rate-hike odds down toward 42% in early August.

The picture shifted again when the August jobs report landed on September 4. The economy added 162,000 nonfarm payroll jobs in August, far above the 55,000 forecast, while July’s reading was revised upward to +21,000. That strong print pushed rate-hike odds back up to roughly 50% heading into the September 15-16 meeting. Adding further nuance, Fed Governor Christopher Waller said on September 3 that he would support keeping rates unchanged if price pressures continue to ease, and that his September vote would hinge heavily on August inflation data due the following week.

That is the real fork in the road. If August PCE confirms that disinflation is resuming after July’s pause, and if core PCE continues its slow grind toward 3%, the case for holding rates steady grows stronger and Moore’s vision gets a second wind. If energy prices re-accelerate with renewed Middle East hostilities, and the August inflation print echoes July’s disappointment, three dissenters could become a majority on September 16. You can read the Fed’s official price stability framework directly on the Federal Reserve’s monetary policy page.

Editor’s note: This article has been updated to reflect the July 2026 PCE report (headline PCE held at 3.7% year over year for a second consecutive month, core PCE also unchanged at 3.3%, with real spending flat), the August 2026 jobs report showing 162,000 payrolls added and a revision of July to +21,000, the rise of the 10-year Treasury yield to 4.79% and its recent high of 4.818%, and the increase in the five-year break-even inflation rate to 2.47% as of September 4, 2026.

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