Long-Run Inflation Uncertainty

In this commentary I argue that option price data offer useful insights into the long-run macroeconomic uncertainty perceived by investors. Data on inflation options in the United States show substantial dispersion in the risk-neutral distribution of long-run inflation rates. This may indicate that substantial uncertainty about the inflation target still exists. However, I argue that a high dispersion in the risk-neutral distribution could also reflect disagreement among investors who are confident in their own forecasts and do not necessarily perceive a high degree of subjective uncertainty. Disagreement could potentially reconcile the relative stability of inflation in recent years with the substantial dispersion in the risk-neutral distribution of long-run inflation and in survey forecasts of long inflation.