The dynamics of UK and US inflation expectations

The relationship between short term and long term inflation expectations in the US and the UK is investigated with a focus on inflation pass through (i.e. how changes in short term expectations affect long term expectations). An econometric methodology is used which allows for the uncovering of the relationship between inflation pass through and various explanatory variables. Empirical results are related to theoretical models of anchored, contained and unmoored inflation expectations. For neither country are anchored or unmoored inflation expectations found. For the US, contained inflation expectations are found. For the UK, empirical findings are not consistent with the specific model of contained inflation expectations presented here, but are consistent with a broader view of expectations being constrained by the existence of an inflation target.

► We investigate the relationship between short term and long term inflation expectations.
► The focus is on pass through of changes in short term expectations on long term.
► We use smoothly mixing regression models to uncover pass through relationship.
► Empirical results are related to theoretical models of ination expectations.