Friday, April 30, 2021

Inflation expectations term structure - What are forecasters thinking when we form an inflation curve?


There are a number of ways to look at the term structure of inflation expectations. One can look at inflation swaps, break-evens across the Treasury curve, or calculate expectations from survey forecasts. Many of these methods are plagued with technical issues or do not make term structure calculations easy. The Philadelphia Fed has made this process easier with their inflationary expectations term structure model (ATSIX) that converts survey information into a more usable form. 

The ATSIX curve can be subtracted from nominal rates to create a real interest rate series. The ATSIX curve can be decomposed into a level, slope and curvature component no different than a yield curve.

Note that the last monthly update shows a shift up in inflation and an inversion of the expectations curve. All of the expectations are above the 2% target.   

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