Morgan Stanley strategists project a drop in 2-year inflation expectations

Morgan Stanley strategists anticipate a decline in two-year inflation expectations following May CPI data releases. Their projections suggest the reading may fall below economist forecasts, potentially weighing on near-term market prospects. Analysts note current inflation swap pricing already reflects more subdued price growth than consensus estimates.

Declining oil prices and reduced likelihood of escalated trade tariffs are further dampening short-term inflation expectations. Meanwhile, the gap between 2-year (2.79%) and 10-year (2.48%) price growth projections may narrow in the near term, with analysts advising investors to prepare for this scenario.

However, risks remain from potential goods value acceleration and trade policy shifts. If these materialize, the gap between short- and long-term inflation expectations could widen, forcing trading strategy adjustments. Meanwhile, falling oil prices would likely exert stronger downward pressure on near-term inflation outlooks.