The Effect of Oil Prices on Break-Even Inflation Rates of the United States (in Korean)

Jinyong Kim (), Junecheol Kim () and Hyung Joon Lim ()
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Jinyong Kim: Secretariat, The Bank of Korea
Junecheol Kim: Reserve Management Group, The Bank of Korea
Hyung Joon Lim: Gangneung Branch, The Bank of Korea

No 2017-10, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This article is an empirical study on the effect of changes in oil prices on break-even inflation rates (BEIs) of Treasury Inflation Protected Securities (TIPS) of the United States. The results of this analysis show that oil prices make a statistically significant effect on the BEIs with maturities of 2 year, 5 year, and 10 year. These sensitivities are salient in the BEIs with shorter maturities. These implies that the changes in oil prices can affect inflation expectations in the short term but this effect gets diminished to the extinction because inflation expectations depend on the inflation target of a monetary policy. Notably, the 5Y5Y BEI has a statistically significant relation with the changes in oil prices only when the slope of oil futures curve flattens and oil prices are falling. This observation reveals that financial market participants adjust their inflation expectations with confidence only in case of the simultaneous drop of the slope of oil futures curve and oil prices. Assuming the BEI is a reasonable estimator of inflation expectations extracted from financial market, oil prices make a limited impact on medium and long term inflation expectations (5Y5Y BEI). From these results we can make an inference that current movements of oil prices and financial market participants'expectation of oil price path make joint contribution to the formation of medium and long term inflation expectations.

Keywords: Treasury inflation protected securities (TIPS); Break-even inflation rate; Inflation expectations; Oil prices (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 Q43 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017-03-20
New Economics Papers: this item is included in nep-ene, nep-mac and nep-mon
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