Inflation Risk Premium

A simple consumption-based model implies that the inflation risk premium should be high when inflation and growth are more negatively correlated, and vice versa. The authors calculate two measures of inflation risk premium: One is the difference between breakeven inflation and survey-based inflation expectations, and the other is the correlation between survey-based growth and inflation forecasts. They show that both measures imply a small inflation risk premium in recent years. Furthermore, the two measures tend to be positively correlated with each other.