Bannière ESG Chaire Caisse de dépôt et placement du Québec

Do mutual fund investors trust inflation estimates from surveys or from asset markets?

Aymen Karoui et Padma Kadiyala
This paper studies how inflows into TIPs and Treasury funds respond to information about future inflation.

First, we find that flows into TIPs decrease, and flows into Treasury funds increase when expected inflation increases. Second, we find that flows into Treasury funds are more sensitive to the Michigan survey of expected inflation, than to inflation forecasts that emerge from asset prices. The break‐even inflation rate (BEI) that is determined by a no‐arbitrage constraint between nominal Treasury yields and real TIP yields has no marginal explanatory power for flows into either TIPs or into Treasury funds.