Inflation Expectations

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).

$(1 + Nominal Rate) = (1 + Real Rate) (1 + Inflation Expectation)$

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.