Inflation Expectations
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 (April 10, 2019)
The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.74 percent. In other words, the public currently expects the inflation rate to be below 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.
Figure 1 below, “Ten-Year Expected Inflation and Real and Inflation Risk Premia,” shows 10-year expected inflation over time. It also shows the model’s estimates of the real risk premium and the inflation risk premium. The real interest rate is also provided in the Excel file. 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, “Ten-Year TIPS Yields versus Real Yields,” 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, “Expected Inflation Term Structure,” 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.
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?
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Inflation Expectations Charts
- Ten-Year Expected Inflation and Real and Inflation Risk Premia
- Ten-Year TIPS Yields versus Real Yields
- Expected Inflation Term Structure