Will nominal interest rates predict future inflation ?
Unfortunately, the future is not predictable. However, we can draw some conclusions from the current interest rates about the market expectations of the future inflation rates. The conventional wisdom is that a steep yield curve ( which tracks the relationship between the interest rates and the maturity of government bonds) indicates higher inflation expectations for the future: http://www.reuters.com/article/idUSTRE5B… Shifts in the yield curve may also be indicative for inflation expectations: Between 1989 and 2000, for example, the yield curve in the US shifted down around 2.4 percentage points for each maturity, so that by 2000, the yield curve was again flat, but this time at around 6 percent. The difference in the level of the yield curve between these two periods likely reflects a significant change in inflation expectations from 1989 to 2000 which fell about 2 percentage points in the same period.
