Measuring market inflation expectations

Of the available measures of inflation expectations, those available with highest frequency are taken from financial market pricing — so-called ‘break-even’ inflation rates from the bond market and the market for inflation swaps. Bond market derived measures — which can be subject to both positive and negative biases — suggest medium-term inflation expectations are currently anchored within the Reserve Bank of Australia’s target band. Inflation swap rates — which can be subject to their own biases — also suggest that medium-term expectations are well contained. Finally, forward inflation expectations derived from the inflation swaps curve suggest that the market concurs with Treasury estimates that the introduction of the carbon price will have a modest, one-off impact on headline CPI of around 0.7 per cent in 2012-13.