# Don’t judge the inflation book by its cover

Market-based long-term inflation expectations – as revealed by index-linked bonds or inflation swaps – tend to concur. They are meaningful because capital markets participants are incentivized to price them as accurately as possible: more directly than other agents, they have skin in the game. Market-based inflation expectations have two components: on the one hand, a long-term, adaptive (or backward looking) component, which is linked to the perceived (or cyclically-adjusted) rate of inflation and, on the other hand, a short-term, rational (or forward-looking) component, which can be proxied mainly by the ISM employment index and secondarily by the oil price. As the adaptive component exhibits some inertia, it holds both the rational component and inflation expectations on the leash.