Should central banks care if people understand them? Whereas once Alan Greenspan famously declared: “If I seem unduly clear to you, you must have misunderstood what I said”, central bankers now dedicate considerable time and thought to transparency and communications. While transparency initiatives have value in their own right in improving accountability, results from the Bank’s Inflation Attitudes Survey suggest that they could have potentially far-reaching effects on the economy through their impact on households’ expectations. If they improve households’ knowledge of central banks, they may produce inflation expectations that are more stable and closer to the inflation target in the medium term – that is, ‘better-anchored’ expectations.
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Inflation breakevens and inflation swap rates have fallen a lot in recent years. Big falls have often occurred amid deteriorating risk sentiment. This isn’t a new phenomenon. Looking across markets and time periods, I show that measures of financial market inflation compensation tend to fall when risk sentiment worsens. What’s more, this effect is asymmetric – inflation compensation doesn’t rise by as much when risk sentiment improves.
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David Elliott, Chris Jackson, Marek Raczko and Matt Roberts-Sklar.
Oil prices have fallen by more than 50% since mid-2014. For much of this period, financial market measures of both short-term and longer-term inflation expectations appear to have mirrored moves in oil prices, particularly in the US and euro area. But how strong is the relationship between oil prices and financial market inflation expectations, and what should we make of it?
Continue reading “Does oil drive financial market measures of inflation expectations?”