Pass-through from short-horizon to long-horizon inflation expectations, and the anchoring of inflation expectations

BIS Working Papers  |  No 895  | 
28 October 2020



Inflation expectations are said to be anchored if long-horizon expectations do not change very much in response to shocks. Then any deviation in inflation from target will tend to revert over time. This gives central banks greater flexibility in deciding how to respond to shocks without losing control of inflation.


The paper uses the forecasts of professional forecasters to assess how well inflation expectations are anchored in a sample of 44 economies. It uses changes in forecasters' views of near-term inflation to identify shocks that are likely to affect inflation. If long-term expectations tend to move together with short-term expectations, then expectations are poorly anchored. By contrast, if long-term expectations remain stable even when short-term expectations change, then expectations are tightly anchored.


The paper shows that the share of economies with anchored expectations has increased over time. When we look to see why, we find that inflation targeting has played an important role. We also find that inflation expectations have remained well anchored over the last decade when inflation has been weak in many economies.


We investigate pass-through from short-horizon to long-horizon inflation forecasts as a way to assess the anchoring of inflation expectations. We find an overall decline in the pass-through in our sample, with the share of economies having anchored expectations increasing over time. We then investigate what might explain the increase in anchoring. Inflation targeting plays an important role. Low policy rates and persistent deviations of inflation from target are correlated with a decline in expectations' pass-through. This suggests that longer-term expectations remain well anchored, despite recent low inflation out-turns in many economies.

JEL Classification: E31, E58

Keywords: consensus forecasts, inflation expectations anchoring