An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length.

The term-structure slope contains information about expected future inflation. Frederic Mishkin shows that the spread between the twelve-month and three-month interest rate helps predict the difference between twelve-month and three-month inflation. The authors apply a simple existing framework, which lets the real interest rate vary in the short run but converge to a constant in the long run, to this problem. The appropriate indicator of expected inflation uses the entire length of the yield curve, estimating the steepness of a specific nonlinear transformation, rather than being restricted to a spread between two points. The resulting indicator better predicts inflation over 1960-91. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.