Decaying Expectations: What Inflation Forecasts Tell Us about the Anchoring of Inflation Expectations

Well-anchored inflation expectations are considered to be a reflection of credible monetary policy. In the past, anchoring has typically been assessed using either long-run inflation surveys or breakeven inflation rates on financial assets with long maturities. Here we propose an alternative measure of inflation anchoring that makes full use of readily available, multiple-horizon, fixed-event forecasts. We show that a model where forecasts are assumed to diverge from a perceived longrun anchor towards actual inflation as the forecast horizon shortens fits the data well. It also provides simple estimates of the degree to which inflation expectations are anchored. We use our methodology to examine how inflation anchoring has evolved in forty-four economies.