Thought Leadership: Why those "expectations" of inflation are taking off now

By Farrokh Langdana, director of the Rutgers Executive MBA Program, and professor of finance and economics

First, check this out from last May, 2025: "Bonds know best: From Amber to Red Alert in Seven Day" 

Not much has changed, sadly — and now the update:

Long-term nominal interest rates (I LT) are driven by The Fisher Effect:  I lt = R + (expectations of Inflation).

R is the real interest rate, and the last term on the right-hand-side is "expectations of FUTURE inflation", with the expectations formed today. For a recap I strongly recommend reading my blog from last year. 

Movements (read, spikes) in I LT which we are seeing today (July/August 2026) are primarily driven by the last term on the right-hand-side above, the inflationary expectations.  So, when long-term rates spike today, clearly expectations of future inflation have gone up. So what's going on?

What drives these expectations of future inflation?

1. Impending near-term growth (the Aggregate Demand moving to the right).  This is the one benign scenario.  All the rest below are malevolent.
2. Impending near-term Overheating. (the AD now at Overheating point).
3. Impending cost-push inflation (the Aggregate Supply being shoved to the left due to some expected oil/food shock, Covid/pandemic, or war uncertainty that hurts productivity.
4. And then the present-day culprit—budget deficit non-sustainability that obviously necessitates more and more monetization, which essentially means "printing money" to fund the debt since now we do not have enough lenders parking their money in the U.S. and its sovereign debt (Treasury bonds).
5. Some combination some/all of the above.

Our budget deficits have been non-sustainable now for a few years—the budget/deficit ratio is about 6.5%.  Anything over 5% means that the lights turn amber. Over 6.5% is a red light. Without simply monetizing our deficits, there is really no way we can go on. But this deficit monetization by the Fed — "printing money"— is bound to be inflationary in the near future.  Hence the "expectations" of inflation taking off finally, now.

Why, might you ask, has this happened suddenly? Don't bonds always "know best?" It seems that just recently social media spelled out how much the daily interest rate payments were on our national debt — in the region of $3 to $4 billion daily depending on which website you reach. In any event, this astronomical number finally sunk in. Every phone had this warning prominently displayed. "Mom and Pop America" finally woke up. The panic was on. Investors went from "greed" to "fear" in a nano second.

Buying bonds by printing money, as U.S. Treasury Secretary Scott Bessent is doing, is simply, asinine and irresponsible.  This is the old "Operation Twist" of the Kennedy Administration and later done by (I think) the George W. Bush people. This will be useless and damaging. It is trying to fix the symptoms of the problem without addressing the cause — like putting ice on a fever-ridden patient without curing the underlying cause of the fever (deficit non-sustainability). Trying to artificially  "manage" or "twist" long-term interest rates down, is an exercise in futility — in fact, it will now only exacerbate future inflation as this operation further injects money into the economy. Long term nominal interest rates are endogenously driven — destroying this endogeneity is macroeconomic sacrilege. 

(Lots more on many of my past blogs here.)

A reporter asked me this afternoon about "what worries you most, Professor Langdana?"  My response was that I wonder whether the bad macro that we are deploying now is due to (i) our macro-leaders, who, in spite of knowing better, are just kicking the can down the road to calm down the masses and to let it be somebody else's problem down the road, or (ii) our macro-leaders are clueless and have no idea what they are doing. Both options are terrifying.

Welcome to the Powerhouse and C-bar up, in spite of it all.

Dr. Farrokh Langdana is a professor of finance and economics at Rutgers Business School, and director of the globally ranked Rutgers Executive MBA Program—The Powerhouse. He is the recipient of more than 30 teaching awards, including the highest possible teaching award at Rutgers University – the Warren I. Susman Award. All the opinions and analyses expressed here are his, and not necessarily those of Rutgers Business School.