How to Calculate Expected Level of Inflation Using Fisher Equation

What is the expected level of inflation?

The nominal, risk-free rate on T-bills recently is 1.36%. If the real rate of interest is 0.79%.

Expected Level of Inflation Calculation

The expected level of inflation is 0.57%.

To calculate the expected level of inflation, we can utilize the Fisher equation. The Fisher equation states that the nominal interest rate (r) is equal to the sum of the real interest rate (rr) and the expected inflation rate (IP). Mathematically, it is expressed as: r = rr + IP

In this case, the nominal interest rate (r) is given as 1.36%, which represents the nominal, risk-free rate on T-bills. The real interest rate (rr) is given as 0.79%.

To find the expected level of inflation (IP), we can rearrange the Fisher equation as follows: IP = r - rr

Substitute the given values into the equation: IP = 1.36% - 0.79%

Calculate the difference to determine the expected level of inflation: IP = 0.57%

Therefore, the expected level of inflation is 0.57%.

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