Weak energy prices lower US inflation expectations Long-term market measures of US inflation touched a three-year low on Tuesday with weaker oil prices and a stronger dollar dulling investor appetite for owning inflation insurance. The 10-year US break-even inflation rate currently predicts consumer prices will rise an average 1.86 per cent each year during the next decade. This is the lowest level since October 2011 and sits below the Federal Reserve's target of at least 2 per cent. During the past decade, the US break-even rate, which reflects the difference between nominal Treasury and Treasury inflation protected securities, has tended to range between 2 per cent and 2.5 per cent. In turn the allure of US Tips, which help insulate holders from the threat of rising consumer prices, by appreciating in value, has been eroded by the lack of inflation pressure. James Evans, portfolio manager at Brown Brothers Harriman, said weaker oil prices have trumped the appeal of owning Tips based on long-term valuation prospects. He said the release of minutes on Wednesday from last month's Federal Reserve meeting, along with monthly inflation data and a $13bn sale of 10-year Tips on Thursday, will provide investors with plenty to consider about the asset class. The decline in market expectations of US inflation reflects a global disinflationary trend that alarms policy makers in the UK, eurozone and Japan. Falling commodity prices and a stronger dollar against the backdrop of modest US wage gains has combined to pull US inflation expectations sharply lower this year. "Investors are questioning whether central banks can achieve their inflation targets," said Richard Gilhooly, strategist at TD Securities. He said Tips have underperformed since mid-October, with the message of the Fed looking to tighten policy next year helping lower inflation expectations. After rising to about 1.95 per cent in the wake of Treasury trading turmoil in mid-October, the 10-year break-even rate on Tuesday eased below last month's closing low of 1.865 per cent, following the path of weaker oil prices. While the Fed has played down the recent drop in break-even measures, the slide in oil prices has not escaped the attention of consumers. The University of Michigan's consumer sentiment survey last week showed a drop in long-term US inflation expectations from 2.8 per cent to 2.6 per cent, the lowest level since 2009. That comes as the Fed's preferred measure of inflation was up at an annualised rate of 1.4 per cent in September. Steven Ricchiuto, economist at Mizuho Securities, said the Fed meeting minutes will matter as "the investor community will be looking for any new information on the Fed's balance between a declining jobless rate and the accumulation of disinflation pressures evident in the economy." The release of October consumer price data on Thursday will be followed by the Tips sale. Mr Evans suspects the auction may fare well as investors can take advantage of being able to buy large amounts of paper, in contrast with a far less liquid secondary market. Auctions are liquidity events and I would not be surprised if investors take the view that on a long-term basis, 10-year break-even protection is cheap.