Assessing the Term Structure of Expected Inflation Using Treasury Inflation- Protected Securities
NEAR REAL-TIME MEASURES FOR THOSE WHO NEED QUICK ESTIMATES
Dr.
Albert E. DePrince, Jr., joined Middle Tennessee State University (MTSU)
in 1991 as professor of economics and finance. He is also one of six independent
directors of a major mutual fund and variable annuity family, a position
to which he was elected in 1998. Prior to joining MTSU, Dr. DePrince was
with Marine Midland Bank from 1978 through 1991 and served at its chief
economist. Preceding his tenure at Marine Midland Bank, Dr. DePrince was
an economist with the Federal Reserve Bank of New York for nine years.
He is a director of the Academy of Economics and Finance and a member
of the executive committee of the International Atlantic Economic Society.
In the forecasting area, he is a participant in the Blue Chip Financial
Forecast survey.
With the 1997 introduction of Treasury Inflation- Protected Securities, or TIPS, the calculation of market- based inflation expectations became possible. With the passage of time and the issuance of successive securities, it also became possible to estimate the term structure of expected inflation. That is, how do expectations differ over alternative forecast horizons? This paper estimates and assesses such a term structure. The process is fraught with problems stemming from various factors that affect the yields of inflation-protected and conventional securities used to calculate the expected inflation measures. Even so, the study finds that the approach provides at least crude estimates of expected inflation over various forecast horizons, and those estimates represent near real-time measures for those who must make ongoing decisions based on expected inflation. Equally important, this paper provides the reader with an understanding of readily available, market-based forecasts of inflation.