Low Growth and Low Inflation Expectations in the Post–COVID-19 World: A Market-Based Perspective

Abstract

Recovering from the COVID sell-off, inflation brekaeven increased sharply in the second half of 2020 while real yields declined materially. The analysis decomposes the inflation breakevens to strip out the role of inflation expectations and risk premia. Despite evidence of upward movement in five-year market-implied inflation expectations after the March sell-off, especially in the United States, such recovery appears to represent more of a reversion toward a preexisting downward trend that emerged after the global financial crisis.

Keywords: Inflation, monetary policy, risk premia, inflation breakeven, market implied densities

JEL Classification: E31, E43, C58, G15