12.12.18

The Federal Reserve Bank of Cleveland’s inflation expectations model uses Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations to calculate the expected inflation rate (CPI) over the next 30 years. The Cleveland Fed model is run every month on the date of the CPI release.

Latest Inflation Expectations Model Release (December 12, 2018)

The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 2.09 percent. In other words, the public currently expects the inflation rate to be above 2 percent on average over the next decade.

Historical Data

• Excel: This spreadsheet contains the inflation expectations model’s output from 1982 to the present. Output includes expected inflation for horizons from 1 year to 30 years, the real risk premium, the inflation risk premium, and the real interest rate.
• Archives: View previous releases of inflation expectations going back to January 2015.

How to Interpret the Data

We report 10-year expected inflation, which is the rate that inflation is expected to average over the next 10 years.

We also provide the model’s estimates of the inflation risk premium, the real risk premium, and the real interest rate (see the charts below and the Excel file above). The inflation risk premium is a measure of the premium investors require for the possibility that inflation may rise or fall more than they expect over the period in which they hold a bond. Similarly, the real risk premium is a measure of the compensation investors require for holding real (inflation-protected) bonds over some period, given the fact that future short-term rates might be different from what they expect. Both the real risk premium and the inflation risk premium can be interpreted as investors’ assessment of risk. In the case of the real risk premium, it is an assessment of the risk of unexpected changes in the real interest rate, and in the case of the inflation risk premium, it is an assessment of the risk of unexpected changes in inflation.

In figure 2 below we compare the model’s estimate of 10-year real interest rates against TIPS yields. The figure can be interpreted as illustrating the importance of factors not in the model (taxes, liquidity, the embedded option) for the TIPS market. As TIPS are not used in the model, it also serves as a simple out-of-sample test for the model.

Figure 3, yield curve, shows the model’s estimates for expected inflation at horizons of 1 to 30 years at three points in time: the current month, the previous month, and the previous year.

The Excel file also provides estimates of the 1-month and 1-year real interest rate. These estimates can be interpreted as the actual interest rate, minus inflation, over the next month or the next year.

Resources

• Inflation Expectations, Real Rates, and Risk Premia: This working paper provides the technical details of the model.
• Inflation: Noise, Risk and Expectations: This Commentary explains to a more general audience how the model’s estimates are better than alternative approaches.
• A New Approach to Gauging Inflation Expectations: This Commentary explains how the model is constructed and what it provides to a more general audience.

Questions?

• For additional information, contact us.
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Ten-Year Expected Inflation and Real and Inflation Risk Premia

Ten-Year TIPS Yields versus Real Yields

Expected Inflation Term Structure