Assessing the Risk to Inflation from Inflation Expectations

11 Pages Posted: 15 Jun 2011

See all articles by Clare Macallan

Clare Macallan

Bank of England - Monetary Assessment and Strategy Division

Tim Taylor

Bank of England

Tom O'Grady

Bank of England

Date Written: June 13, 2011

Abstract

Inflation expectations play an important role in the transmission mechanism of monetary policy. There is a risk that the periods of above-target CPI inflation in the past three years might cause inflation expectations to drift upwards. That might make inflation itself more persistent, via changes in price and wage-setting behaviour. And so, other things being equal, returning inflation to target would require tighter monetary policy. This article provides a framework that can be used to monitor the risk to inflation from inflation expectations. While recent developments provide few signs that the risk is materialising, the imperfect nature of data mean that the risk can be assessed only imperfectly.

Suggested Citation

Macallan, Clare and Taylor, Tim and O'Grady, Tom, Assessing the Risk to Inflation from Inflation Expectations (June 13, 2011). Bank of England Quarterly Bulletin No. 2011 Q2, Available at SSRN: https://ssrn.com/abstract=1865190

Clare Macallan (Contact Author)

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Tim Taylor

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tom O'Grady

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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