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Measuring market inflation expectations

Author

Listed:
  • Will Devlin

    (Treasury, Government of Australia)

  • Deepika Patwardhan

    (Treasury, Government of Australia)

Abstract

Of the available measures of inflation expectations, those available with highest frequency are taken from financial market pricing — so-called ‘break-even’ inflation rates from the bond market and the market for inflation swaps. Bond market derived measures — which can be subject to both positive and negative biases — suggest medium-term inflation expectations are currently anchored within the Reserve Bank of Australia’s target band. Inflation swap rates — which can be subject to their own biases — also suggest that medium-term expectations are well contained. Finally, forward inflation expectations derived from the inflation swaps curve suggest that the market concurs with Treasury estimates that the introduction of the carbon price will have a modest, one-off impact on headline CPI of around 0.7 per cent in 2012-13.

Suggested Citation

  • Will Devlin & Deepika Patwardhan, 2012. "Measuring market inflation expectations," Economic Roundup, The Treasury, Australian Government, issue 2, pages 5-17, August.
    • Handle: RePEc:tsy:journl:journl_tsy_er_2012_2_1
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    File URL: http://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2012/Economic%20Roundup%20Issue%202/Downloads/01_Measuring_market_inflation_exp.ashx
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    References listed on IDEAS

    as
    1. Richard Finlay & Sebastian Wende, 2012. "Estimating Inflation Expectations with a Limited Number of Inflation-Indexed Bonds," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 111-142, June.
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    Cited by:

    1. Covarrubias, Enrique & Hernández-del-Valle, Gerardo, 2016. "Inflation expectations derived from a portfolio model," MPRA Paper 69489, University Library of Munich, Germany.
    2. Pedro Pires Ribeiro & José Dias Curto, 2018. "How do zero-coupon inflation swaps predict inflation rates in the euro area? Evidence of efficiency and accuracy on 1-year contracts," Empirical Economics, Springer, vol. 54(4), pages 1451-1475, June.

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    More about this item

    Keywords

    bond market; inflation; carbon price;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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