Do Inflation-Linked Bonds Predict Future Inflation? a reassessment using novel methodologies and instruments

This study revisits the question "Do inflation-linked bonds contain information about future inflation?" posed by Vicente and Guillen (2013), by addressing two critical issues related to the breakeven inflation rate (BEIR) that were not considered by the authors: the inflation lag embedded in inflation-indexed securities and the seasonality inherent in inflation indices. The analysis evaluates three methods for calculating the BEIR for the purpose of forecasting inflation: the one used by Vicente and Guillen (2013), which we refer to as Naïve BEIR; an alternative measure derived from government bonds but incorporating corrections for inflation lag and seasonality (Bond Market BEIR, BM-BEIR); and a BEIR based on the Futures Market (Futures Market BEIR, FM-BEIR), which also includes these adjustments. The results show that BM-BEIR significantly outperforms Naive BEIR for short-term horizons (3 and 6 months), closely tracking actual inflation. Moreover, both BM-BEIR and FM-BEIR match the predictive accuracy of survey expectations, while offering the advantage of frequent updates - highlighting their utility for short-term inflation forecasting and decision-making.