DECOMPOSING UK INFLATION EXPECTATIONS USING SURVEY-BASED MEASURES

This paper derives a time-varying model to examine the dynamic interdependencies between realized and expected inflation. The results show inflation expectations at the short and long horizon have been uncorrelated over the past three decades, which is consistent with the anchored inflation expectations hypothesis. There is also little evidence that changes in realized inflation have been the result of self-fulfilling variations in the expectations of economic agents. Despite high commodity prices and above-trend inflation, expectations since the financial crisis in 2008 have not become unhinged from fundamentals.