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What are Implied Inflation Expectations?

Whereas the consumer price index (CPI) gives an indication of recent levels of price inflation, implied inflation expectations are market-based estimates of future price inflation over a given time period. By analyzing the differences in yield between treasury inflation-protected securities (TIPS) and equivalent maturity treasuries, one can gauge the level of inflation that the market is ascribing to a future time period. This can be helpful for a central bank in determining interest rate policies, or for investors in determining asset allocations.