The inflation rate the market implies for the five-year period beginning five years from now, used as the cleanest gauge of whether long-run inflation expectations are anchored.
It is built from two breakevens. Take the ten-year and five-year breakeven-inflation rates and extract the forward segment between them, which removes the near-term inflation everyone can already see and leaves the part that depends purely on credibility.
Central bankers watch it closely because a drift in this measure means the market has stopped believing the target. A near-term breakeven spiking on an oil shock is noise; this series moving 30 basis points is not.
Example: the 5-year breakeven is 2.55% and the 10-year is 2.40%. The forward is approximately (2 x 2.40) minus 2.55 = 2.25%, so despite elevated near-term inflation the market expects target-consistent inflation in the second half of the decade.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
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