Inflation surged when the Ukraine-Russia conflict started in February this year. Commodities prices such as aluminum, wheat, and oil had increased by more than 50% since then.

The most recent surge in commodities prices is wheat, which has seen its price increase sharply in the wake of India’s decision to restrict exports

Strange as it may seem though, inflation expectations in the US bond market are subsiding despite the recent resurgence in wheat, crude oil, and the commodity complex in general.

Source: 10-Year breakeven inflation rates

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The value implies what market participants expect inflation to be in the next 10 years, on average.

That actually aligns pretty well with the perception that the risk of recession is increasing. At some point, supply-shock-driven inflation is likely to bring about its own demise via demand destruction, and bond investors look to be signaling we are getting close to a tipping point for broad price gains even if wheat and crude stay elevated.