Breakeven inflation

Breakeven inflation is the difference between nominal yield on fixed rate investment and the real yield on an inflation linked investment of similar maturity and credit equality. If average inflation is more than the break even, the inflation linked investments outperform the fixed rate and if inflation averages below the break even the fixed rate investments outperforms.

Break-even inflation = comparable fixed rate – inflation linked real yield

In theory calculating Break-even inflation from simply subtracting real yield from a nominal yield is crude from of properly compounded calculation.

Breakeven for a market with an annual yield
(1 + bei) = (1 + n) / (1 + r) where bei is break-even inflation

For semi-annual market

(1 + bei) = [( 1 + n/2 ) ^2] / [( 1 + r/2)^2]

Where ‘n’ is a yield on nominal bond
And ‘r’ is a yield on inflation-linked bond