Inflation uncertainty in the U.S.: evidence from 1926 to present
Viral V. Acharya, Sebastian Hillenbrand, Venky Venkateswaran, and Margaret Underwood develop a novel Composite Inflation Uncertainty (CIU) index for the United States spanning from 1926 to 2025, constructed from two complementary measures, namely a news-based measure (NIU) and a market-based measure (MIU). For NIU, the authors employ ChatGPT to analyze New York Times articles, prompting the large language model to identify whether articles relate to inflation uncertainty and to assign intensity scores from 1 to 100 based on the degree of uncertainty expressed. For MIU, the authors extract implied volatility from options on bond exchange-traded funds (ETFs) holding Treasuries and TIPS since 2010, then extend the series backward using a prediction model based primarily on commodity price volatility derived from options on gold, silver, corn, soybeans, oil, and natural gas futures. The CIU is defined as the first principal component of these two standardized measures.
Findings
- Inflation uncertainty spiked during major historical episodes including the Great Depression, World War II, the 1970s-1980s stagflation, the Global Financial Crisis, and the post-pandemic period.
- Heightened inflation uncertainty has significant economic consequences: real asset prices (gold, silver, housing) increase by 10-33% for a one-standard-deviation rise in CIU, while nominal assets decline substantially—equity prices fall 8-12%, corporate bond spreads widen, and government bond prices drop roughly 13%.
- Increased inflation uncertainty predicts declines in private investment of 1-2 percentage points and reductions in industrial production over subsequent quarters.
- Regarding drivers, supply-side factors—particularly energy and commodity prices—emerge as the most important source of inflation uncertainty, followed by monetary policy and demand considerations, with the relationship between inflation levels and uncertainty being more nuanced than classical theory suggests.
Inflation Uncertainty: Measurement, Causes, and Consequences
Authors: Viral V. Acharya, Sebastian Hillenbrand, Venky Venkateswaran, Margaret Underwood
From: New York University, Harvard University, Federal Reserve Bank of Minneapolis, University of Michigan
Inflation uncertainty and UK household consumption and spending
In this paper, Johannes J. Fischer, Christoph Herler, and Philip Schnattinger use a large-scale randomized controlled trial (RCT) conducted in March 2024 with nearly 6,000 UK households, embedded within the Bank of England’s Survey of Household Finances. Respondents were randomly assigned to four groups: three treatment groups receiving targeted information about professional forecasters’ inflation predictions (covering expectancy, uncertainty, or both) and a control group with no additional information. The treatments were designed to induce changes specifically in households’ expectations about inflation and its uncertainty, disentangling these two effects.
The authors measured households’ inflation expectations, uncertainty, planned spending, saving behavior, expected income, job loss risk, and future interest rate beliefs, both immediately and in follow-up surveys at 6 and 12 months.
Findings
- Reduced inflation uncertainty leads to higher planned household spending: Households informed about lower inflation uncertainty raised both their planned nominal and real spending significantly, overriding the usual negative link between lower expected inflation and consumption. The strongest effect was found among non-hand-to-mouth and university-educated individuals. The increase in spending is primarily driven by less precautionary saving.
- Lower inflation uncertainty decreases saving rates but increases fixed-return asset holdings: Six months after treatment, households reported reduced monthly savings yet showed higher balances in liquid assets with fixed returns. This suggests an adjustment in portfolio composition when inflation outlook stabilizes, shifting away from riskier cash holdings to assets with more predictable returns.
- Income expectations and uncertainty: Reduced inflation uncertainty was associated with higher expected incomes and lower income risk, but did not change job loss probabilities.
- Long-run expectations: The treatments modestly reduced uncertainty about inflation five years ahead, but the level of long-term inflation expectations remained anchored and unchanged.
- Policy and welfare implications: The results highlight that the welfare cost of inflation uncertainty is distinct from that of higher inflation levels, chiefly operating through precautionary saving.
When the fog clears: the effect of reduced inflation uncertainty on households’ financial behaviour
Authors: Johannes J. Fischer, Christoph Herler, Philip Schnattinger
From: Bank of England
