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Option-implied probability distributions for future inflation

Author

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  • Tom Smith

    (Bank of England)

Abstract

Beliefs about future inflation play a major role in determining the rate of inflation, and so it is important for the Monetary Policy Committee to take them into account when making their policy decisions. A number of measures of central expectations for inflation are available, such as surveys of inflation expectations or measures derived from financial markets. But until recently far fewer measures of beliefs about the full distribution of possible future inflation rates have been available. This article describes a new method for producing option-implied probability density functions for future inflation, which can be used as a measure of that distribution, and examines the recent rise in uncertainty about future inflation that they reveal.

Suggested Citation

  • Tom Smith, 2012. "Option-implied probability distributions for future inflation," Bank of England Quarterly Bulletin, Bank of England, vol. 52(3), pages 224-234.
    • Handle: RePEc:boe:qbullt:0083
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    References listed on IDEAS

    as
    1. Kitsul, Yuriy & Wright, Jonathan H., 2013. "The economics of options-implied inflation probability density functions," Journal of Financial Economics, Elsevier, vol. 110(3), pages 696-711.
    2. Rashmi Harimohan, 2012. "How has the risk to inflation from inflation expectations evolved?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(2), pages 114-123.
    3. Rupert de Vincent-Humphreys & Joseph Noss, 2012. "Estimating probability distributions of future asset prices: empirical transformations from option-implied risk-neutral to real-world density functions," Bank of England working papers 455, Bank of England.
    4. Dan Nixon & Tom Smith, 2012. "What can the oil futures curve tell us about the outlook for oil prices?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 39-47.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Juan Angel Garcia & Sebastian Werner, 2018. "Inflation News and Euro Area Inflation Expectations," IMF Working Papers 2018/167, International Monetary Fund.
    2. Gareth Anderson & Becky Maule, 2014. "Assessing the risk to inflation from inflation expectations," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 148-162.
    3. Filippo Natoli & Laura Sigalotti, 2018. "Tail Co-movement in Inflation Expectations as an Indicator of Anchoring," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 35-71, January.
    4. Galati, Gabriele & Gorgi, Zion & Moessner, Richhild & Zhou, Chen, 2018. "Deflation risk in the euro area and central bank credibility," Economics Letters, Elsevier, vol. 167(C), pages 124-126.
    5. Galati, Gabriele & Gorgi, Zion & Moessner, Richhild & Zhou, Chen, 2018. "Deflation risk in the euro area and central bank credibility," Economics Letters, Elsevier, vol. 167(C), pages 124-126.
    6. Rodrigo Guimarães, 2014. "Expectations, risk premia and information spanning in dynamic term structure model estimation," Bank of England working papers 489, Bank of England.
    7. Alex Haberis & Riccardo M. Masolo & Kate Reinold, 2019. "Deflation Probability and the Scope for Monetary Loosening in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, vol. 15(1), pages 233-277, March.
    8. Scharnagl, Michael & Stapf, Jelena, 2015. "Inflation, deflation, and uncertainty: What drives euro-area option-implied inflation expectations, and are they still anchored in the sovereign debt crisis?," Economic Modelling, Elsevier, vol. 48(C), pages 248-269.
    9. Rodrigo Guimarães, 2012. "What accounts for the fall in UK ten-year government bond yields?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(3), pages 213-223.
    10. Natalie Burr, 2025. "Do inflation expectations respond to monetary policy? An empirical analysis for the United Kingdom," Bank of England working papers 1109, Bank of England.
    11. Scharnagl, Michael & Stapf, Jelena, 2014. "Inflation, deflation, and uncertainty: What drives euro area option-implied inflation expectations and are they still anchored in the sovereign debt crisis?," Discussion Papers 24/2014, Deutsche Bundesbank.
    12. Markus K. Brunnermeier & Yuliy Sannikov, 2012. "Redistributive monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 331-384.
    13. Gimeno, Ricardo & Ibáñez, Alfredo, 2018. "The eurozone (expected) inflation: An option's eyes view," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 70-92.
    14. Becky Maule & Alice Pugh, 2012. "Do inflation expectations currently pose a risk to the economy?," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 110-121.

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