Inflation Expectations
From Open Risk Manual
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Definition
Inflation Expectations are at any given point in time the explicit or implicit Expected realisations of Inflation for any set of agents participating in an economy with a given monetary system.
Measurement
- From asset prices (market derived)
- From surveys
Fisher Identity
The Fisher Identity links current or implied forward inflation rates as a measure of inflation to nominal and real interest rates. It forms the conceptual basis for extracting inflation expectations from asset prices (using comparable fixed-income instruments that are promising nominal and indexed cash flows respectively).
Issues and Challenges
- Extracting inflation expectations from asset prices may be skewed by other market related factors and risk premia that may be hard to isolate
- Inflation Expectations are not obviously linked with Inflation realizations.[1]
References
- ↑ Rudd, Jeremy B. (2021). “Why Do We Think That Inflation Expectations Mat- ter for Inflation? (And Should We?),” Finance and Economics Discussion Series 2021-062. Washington: Board of Governors of the Federal Reserve System