the bond market is, as a rule , a more reliable guide to what global investors believe the future will look like than the erratic stock market. and on wednesday, bond markets sent one signal loud and clear: the trump years are likely to feature higher inflation and higher interest rates than have prevailed in recent years. the interest rate on 10-year treasuries soared to the highest level since january, rising 0.22 percentage points to 2.07 percent. and much of the rise was attributable to investors<u+2019> belief that inflation will be higher than had seemed to be the case before the election surprise. bond market data tells us that consumer prices are on pace to rise 1.7 percent a year over the next half-decade, up from 1.61 percent tuesday. the jump was even larger for longer-term expectations, with expectations of annual inflation over the next 10 years rising 0.13 percentage points and over the next 30 years rising 0.15 percentage points. those numbers are based on the gap between interest rates on regular bonds and inflation-protected bonds. in effect, inflation-protected bonds have become more appealing in the eyes of investors relative to the conventional variety, implying that investors expect prices to rise more quickly than they have been. the changes so far are nothing alarming. the federal reserve has been trying to get inflation up toward its 2 percent target for years, and the swings suggest global investors think they are more likely to achieve that goal in the coming years. but it does suggest that investors see the economic ground shifting in the wake of donald j. trump <u+2019>s surprise victory on tuesday. one big factor seems to be driving the changing sentiment. mr. trump is proposing large tax cuts and a huge amount of new infrastructure spending. if that creates stronger economic growth, that could drive prices higher <u+2014> especially because, as many economists believe, the united states is already near its economic potential. the fiscal stimulus would translate into higher prices instead of more people working. think of it this way: when the government pours hundreds of billions of dollars into infrastructure when there is mass unemployment, it can help put those people back to work and turn it into higher economic output without creating inflation. but when nearly all the people who want a job already have one, that spending just bids up the pay of people already working, eventually resulting in higher prices more broadly. if that<u+2019>s the case, one of two things could happen: the federal reserve could raise interest rates to combat inflation, intentionally slowing the economy. or it could allow inflation to rise. the data on wednesday suggests that markets are pricing in a little of both. analysts think that the boost from fiscal policy could give the fed latitude to more quickly remove its monetary stimulus via low interest rate policies. that<u+2019>s the most obvious driver of the shift in bond markets. but there are a few other possibilities that could be in play, though there isn<u+2019>t much direct evidence of them. first, mr. trump has ignored the established practice of government officials not directly commenting on or attacking the federal reserve with his vocal criticism of chairwoman janet yellen. as president, he will be able to appoint two governors to the seven-member board of the central bank immediately. ms. yellen<u+2019>s term as chair ends in early 2018, so he<u+2019>ll get to replace her if he chooses. (the president can<u+2019>t fire a chairperson because of disagreement over policy choices, only over misconduct.) if as president mr. trump pressures the fed <u+2014> or even just appoints members who are not worried about maintaining the central bank<u+2019>s inflation-fighting credibility <u+2014> inflation and longer-term interest rates would tend to rise. second, higher budget deficits would force the federal government to issue more debt than it would on its current trajectory. a bigger supply of bonds with unchanged demand would, barring anything else, mean lower bond prices, which in the math of bond markets means higher interest rates. third, there are the moments during his campaign when he flirted with the idea of renegotiating the federal government<u+2019>s debt. if he followed up on that idea as president, it would signal to investors worldwide that united states treasury bonds are not among the safest assets on earth. that means that their <u+201c>risk premium<u+201d> should be higher <u+2014> in other words, that interest rates on them should be higher. and finally, if mr. trump follows through on plans to start mass deportations of undocumented immigrants, it could leave some industries with labor shortages, particularly for low-skilled workers. the remaining workers in those industries could demand higher pay, which is good news for them, but it would also contribute to inflationary pressure. again, those explanations are more in the category of speculation than something supported by the data. but whatever the exact mix of causes, it<u+2019>s a reminder that elections can matter for more than just the usual debates over foreign and domestic policy. they also can reshape the financial system. the upshot provides news, analysis and graphics about politics, policy and everyday life. follow us on facebook and twitter . sign up for our newsletter .
the market is betting trump will bring higher inflation and interest rates
neil irwin