Inflation curves show why the headline number is only part of the story

Inflation is often discussed as a single number. In practice, the shape of the inflation swap curve can be just as important as its overall level.

The latest zero-coupon inflation swap curves show a clear contrast between eurozone HICP excluding tobacco and USD CPI. The eurozone curve begins at a much higher one-year breakeven rate before declining sharply across the first few maturities, while the USD curve remains comparatively flat. These differences can have important implications for trading, risk management and valuation.

The front end tells a different story

The most striking feature of the eurozone curve is the steep fall between one and three years. The current one-year breakeven rate is around 3.6%, falling to approximately 2.9% at two years before stabilising further along the curve.

Compared with three months ago, most of the change is concentrated at shorter maturities. Beyond the front end, the current and historical curves are much closer together.

The USD CPI curve shows a different pattern, remaining within a relatively narrow range across maturities and exhibiting a flatter overall profile.

Not all inflation exposure is the same

Two positions with similar headline breakeven rates may have very different sensitivities depending on where they sit on the curve.

For risk and valuation workflows, it is important to distinguish between shifts in inflation levels and changes in slope or curvature. Reliable tenor-level pricing helps market participants identify where movement is occurring across the term structure.

Looking beyond the headline number

Analysing the full curve can provide a more complete view of inflation expectations than any single maturity alone. Differences in curve shape influence relative value, hedge construction, valuation and risk management across inflation-linked markets.

Download a sample of Parameta Solutions inflation data to explore the underlying zero-coupon inflation swap term structures. Parameta Solutions provides inflation data covering zero-coupon swaps, year-on-year swaps, seasonal swaps and inflation options.

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