Bank of Israel - Press Releases - The Expected Rate of Inflation Derived from Various Sources
Central bank: boi | Type: statement | Date: 2017-07-18

Calculated from capital market1
Average of the inflation forecasts for the 12 months ahead4
1-year inflation expectations derived from internal interest
  rates5
1Inflation
expectations derived from the capital market are defined as the ratio between
the yields on unindexed government bonds and the yields on CPI-indexed
government bonds (breakeven inflation). They include an inflation-risk premium
component and various biases deriving from the differences in taxation and
liquidity between different types of bonds. For an explanation of how the
expectations are calculated click on the following link:
www.boi.org.il/en/DataAndStatistics/Pages/InflationExpectationsExplanation.aspx
Forward
expectations are the expectations for the inflation rate over a future period.
The forward rates—exp(j,k)—are derived from the breakeven inflation for j years
and k years. That is:
Where exp(j,k) is the forward expectations
for inflation from the end of year j to the end of year k. For example, exp(3,5)
is the expected rate of inflation from the end of the third year to the end of
the fifth year. Exp(k) is the inflation expectation for k years—for example,
for 5 years. All expectations data are presented in annual terms.
2Forward
expectations for full years, from the end of the third year to the end of the
fifth year.
3Forward
expectations for full years, from the end of the fifth year to the end of the
tenth year.
4The simple arithmetic mean of the inflation forecasts of
commercial banks and economic consulting companies that provide their forecasts
to the Bank of Israel on a regular basis.
5Expectations
derived from the internal interest rates of the five large banks, calculated as
the ratio between unindexed interest rates and CPI-indexed interest rates. The
internal interest rate is calculated for each bank as the average of its
marginal price for raising funds (deposits) and its marginal price for
allocating uses (credit).
6For expectations
derived from the capital market and expectations based on internal interest
rates—average for the CPI month (from the previous CPI reading through the most
recent figure prior to the publication of the current CPI); forecasts—the
average of forecasts which were revised after the CPI was published.