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Measuring inflation expectations, part II

In the previous blog post, we looked at using survey data to measure inflation expectations. Now we consider market-based measures. The graph shows various measures of the breakeven inflation rate, which is computed as the difference in returns of constant-maturity Treasury bills: one being the traditional bill and the other being the inflation-indexed bill. If we look at 10-year Treasury bills, we can evaluate what the markets think the average yearly inflation rate will be over the next 10 years. With such a long horizon, it makes less sense to compare these expectations to realized inflation. But this graph still includes a segment to signal the Fed’s 2% inflation target announced on January 25, 2012, since the purpose of that announcement was to anchor inflation expectations.

How this graph was created: Search for “breakeven inflation” and many series will be shown. Here, we used those with a monthly frequency. For the segment, choose “Add a Series” but select “Trend line” from the pull-down menu. Once that’s added, change the initial date to “2012-01-25” and use “2” for both start and end values.

Suggested by Christian Zimmermann

View on FRED, series used in this post: T10YIEM, T20YIEM, T30YIEM, T5YIEM, T7YIEM

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