<p>Intuitively, this is the story: The interest rate on inflation-linked bonds (which means that the coupon payments are adjusted for inflation) can be seen as a real interest rate, because one is always exactly compensated for the realized inflation. Subtracting this real interest rate ($r$) from a nominal interest rate ($i$) gives the average inflation expectaction ($\pi^e$) over the period remaining before maturity. Just use the fisher-equation to see this: $r=i−π^e$.</p>

CC BY-SA 3.0
2016-03-22T19:40:42.873Z
2016-03-22T19:40:42.873Z
Wecon
<p>«Popular market measures of US inflation expectations are climbing sharply higher in the wake of this week’s Federal Reserve meeting, which analysts say hinted at officials being willing to tolerate higher inflation before tightening monetary policy more aggressively.</p>

<p>So-called “breakeven rates”, which are a rough estimate of expected inflation derived from comparing the yields of conventional and inflation-proof Treasuries, have jumped markedly this month, and have gone even higher since Wednesday’s Fed meeting»</p>

<p>Could you please explain how are these breakeven rates estimated? And why they can be a 'rough estimate' of expected inflation? </p>

<p>Any help would be appreciated.</p>

CC BY-SA 3.0
2016-03-21T21:45:29.663Z
@Wecon Thanks, I thought that it was more complicated than that...
An old man in the sea.
CC BY-SA 3.0
2016-03-22T14:42:38.330Z
@Wecon, why not write up your comment as an answer?
BKay
CC BY-SA 3.0
2016-03-22T19:38:45.750Z
@BKay, thanks for the suggestion. My first idea was that, possibly, more thorough or formal analyses or explanations would follow. But, indeed, on second thoughts I'll remove my comment and repost it as an answer.
Wecon
<macroeconomics>
Estimates for 'inflation expectations': the 'breakeven' rates. What are they?
An old man in the sea.
# Estimates for 'inflation expectations': the 'breakeven' rates. What are they?

(Asked by: username_0 on 2016-03-19)

«Popular market measures of US inflation expectations are climbing sharply higher in the wake of this week’s Federal Reserve meeting, which analysts say hinted at officials being willing to tolerate higher inflation before tightening monetary policy more aggressively.

So-called “breakeven rates”, which are a rough estimate of expected inflation derived from comparing the yields of conventional and inflation-proof Treasuries, have jumped markedly this month, and have gone even higher since Wednesday’s Fed meeting»

Could you please explain how are these breakeven rates estimated? And why they can be a 'rough estimate' of expected inflation?

Any help would be appreciated.

**Tags:** macroeconomics

> **Comments:**
> **username_0**: @username_2 Thanks, I thought that it was more complicated than that...  
> **username_1**: @username_2, why not write up your comment as an answer?  
> **username_2**: @username_1, thanks for the suggestion. My first idea was that, possibly, more thorough or formal analyses or explanations would follow. But, indeed, on second thoughts I'll remove my comment and repost it as an answer.  

---

## 1 answers

### Answer by username_2 on 2016-03-22. Score: 1 | Accepted answer

Intuitively, this is the story: The interest rate on inflation-linked bonds (which means that the coupon payments are adjusted for inflation) can be seen as a real interest rate, because one is always exactly compensated for the realized inflation. Subtracting this real interest rate ($r$) from a nominal interest rate ($i$) gives the average inflation expectaction ($\pi^e$) over the period remaining before maturity. Just use the fisher-equation to see this: $r=i−π^e$.


---

