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, has 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 recent 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 is 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 actually agrees with Moore, or whether he is reading the tea leaves a little hot. Events since his appearance have complicated the picture in ways worth walking through.

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 is the market’s bet on average inflation over the next half decade, and Moore is right that it is among the cleanest single reads available. “That is the best market prediction of where inflation is headed,” he said.

At the time Moore spoke, the reading sat at 1.92% as of June 25, with an intra-month range of 1.64% to 2.03%. That is a world below the 3.5% he says prevailed a month earlier. By July, the five-year break-even had edged back up to around 2.16%, according to Federal Reserve data tracked by Trading Economics. The directional story Moore told held up, but the rate did not stay in the low-1.9% range for long. The ten-year Treasury yield, meanwhile, has moved in the opposite direction from what the disinflationary thesis would predict: it stood at roughly 4.4% on June 25 and has since climbed to around 4.65%, reflecting persistent uncertainty about the Fed’s next move.

What the actual inflation prints are doing

The awkward wrinkle Moore acknowledged is 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%, a modest improvement. 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. Moore’s basic argument, that energy would roll off and drag the headline number lower, played out in June. The catch is that the Iran truce has since collapsed, fighting resumed in July, and energy’s reprieve may prove temporary.

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.

The consumer spending data available at the time backed that up. Durable goods PCE climbed to $2,374.4 billion (annualized) in May, 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 added another data point: personal spending rose 0.3% month over month in June, even as income grew only 0.2%, suggesting the consumer has not pulled back despite elevated prices.

What to watch next

Moore’s biggest claim was the policy implication. “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. The Federal Reserve held its benchmark rate steady in a range of 3.5% to 3.75% at its 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 signals the hawkish wing of the committee is not satisfied with standing pat.

Markets have taken notice. Futures-market odds of a September hike ran as high as 65% in late July before a weaker-than-expected July jobs report pulled them back. Nonfarm payrolls unexpectedly fell 23,000 in July, and prior months were revised down by a combined 103,000, which cooled rate-hike expectations to roughly 42% as of early August. Fed Chair Warsh, according to reporting by the Financial Times, has signaled he would still be prepared to raise rates in September if the next inflation readings come in hot.

That is the real fork in the road. If the August PCE print confirms that June’s energy-driven disinflation is durable, and if core PCE continues its slow grind toward 3%, the break-even rate and the federal funds rate can converge peaceably toward Moore’s vision. If energy re-accelerates with the resumption of Middle East hostilities, the Fed’s communication strategy gets tested in public and three dissenters become a majority. 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 incorporate June 2026 PCE data (headline PCE eased to 3.7% year over year, core to 3.3%), the Federal Reserve’s late-July rate hold at 3.5% to 3.75% with three hawkish dissents, the subsequent rise in the ten-year Treasury yield to around 4.65%, and the shift in September rate-hike odds following a surprise decline in July nonfarm payrolls.

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