Real Time Monitoring of the US Inflation Expectation Process

Abstract

The real time supervision of inflation expectations is an important issue for monetary policymakers, especially in presence of economic uncertainty. In this paper we propose a novel methodology for sequential monitoring of noisy and heteroscedastic market based daily proxies for short, medium and long run inflation expectations. Our empirical evidence suggests that the on-line surveillance of risk adjusted US forward breakeven inflation rates by means of the CUSUM detector appears to be helpful to extract timely signals on potential shifts in market expectations. In particular, the obtained signals indicate important turning points in market based measures of inflation expectations. These turning points also tend to materialize in lower frequency survey based measures.