Inflation Uncertainty: Measurement, Causes, and Consequences

We measure and analyze inflation uncertainty in the US. We construct a novel composite indicator of inflation uncertainty (CIU) from two components: a news-based measure derived from textual analysis of newspaper articles using large language models and a market-based measure that draws on prices of options on Exchange Traded Funds and commodities. Unlike survey- or inflation-option-based measures, our index is available in real time and extends back to 1926. CIU reveals that inflation uncertainty spiked during the Great Depression, World War II, the 1970s and 1980s, following the Global Financial Crisis, and in the post-pandemic period. We highlight the driving forces behind these fluctuations in uncertainty and analyze their economic consequences. Heightened inflation uncertainty is associated with higher prices of real assets — such as gold, silver, and housing — but with lower prices of nominal assets, including government bonds, corporate bonds, and equities. Moreover, we find that increases in inflation uncertainty are followed by declines in private investment and real economic activity.