Tariffs and the Term Structure of Inflation Expectations

Stéphane Auray, Michael Devereux, Anthony M. Diercks, Aurélien Eyquem and Joon Kim

No 35076, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Inflation expectations derived from financial markets exhibited unprecedented dynamics in 2025: the correlation between one-year inflation swaps and one-year-ahead one-year forward rates turned significantly negative for the first time on record. We show that this decoupling occurred primarily on days when tariff news dominated market pricing, using a two-stage event classification validated by Bloomberg news trends. Standard small open-economy New Keynesian models in which tariffs generate a one-time price-level increase imply positive comovement across horizons and cannot explain this pattern. We explain these occurrences through the lens of an amended small open-economy New Keynesian model. Three ingredients prove critical for reproducing the observed negative conditional correlation between spot and forward inflation after tariff shocks: targeting year-on-year inflation, substantial interest-rate inertia, and persistent tariffs. Under empirically plausible calibrations, the model generates a negative correlation conditional on tariff shocks while preserving a positive unconditional correlation, suggesting that the 2025 twist in the term structure reflects expectations of a persistent policy response to trade shocks.

JEL-codes: C50 E10 G1 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-dge and nep-mon
Note: IFM
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35076.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:35076

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35076
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().