Before acknowledging Break-even Inflation let us get a glimpse of what Break-even means.

Break-even is nothing but neither profit nor loss. It means profit and loss are both parallel to each other.

Inflation on the other hand is generically a rise in the price of goods and services over a period of time.

In the bond market or capital market, the difference between the yield of the fixed rated investment and the yield of inflation-linked investment having similar attributes in terms of credit quality and tenure is called Break-even Inflation.

Investing into a bond market itself means speculating on inflation level. Traditionally fixed rated investments found it difficult to match up the returns to the level of inflation since it is important to study it the fixed-income investments break even with inflation.

Therefore the difference in the nominal yield of the fixed rated bond and the real yield on an inflation-linked bond provides the breakeven point of inflation.

Break-even inflation is calculated by the formula :

Fixed-rate yield - Inflation-linked real yield = Break-even inflation

For example: if a corporate bond provides a 6% coupon for a period of 10 years and an inflation-linked bond provides a 1.20% coupon for a period of 10 years

Then, 6.00 - 1.20 = 4.80% is the break-even inflation rate i.e. the number indicating that the inflation would be around 4.80% in the coming years.

In the above example, an inflation-linked coupon of 1,20% is determined by adding the current rate of inflation to the inflation-linked coupon rate.

In order to surpass the fixed-rate investment, the average inflation rate should be more than the Break-even inflation rate. On the other hand, if the inflation average is below the breakeven inflation rate, the fixed-rate investment would surpass the inflation-linked investment.

Hence this number of break-even inflation tells us what inflation rate would have to be in order to break even for investors or simply to earn the same as the inflation rate while deciding on a bond over another. This calculation gives investors an idea of how inflation would look like in the future based on the current market situation and that of the past few years.