This paper analyses a market-based measure of expected inflation computed as the difference between yields to maturity of nominal and inflation-indexed Italian government bonds (break-even inflation rate, BEIR). In the first part of the paper, we assess the contribution of inflation, liquidity and credit risk, and other possible variables. In the second, we decompose the BEIRs into expected inflation rates and their relative risk premia.
Since the second half of 2018, inflation expectations, adjusted for credit and liquidity risk, have persistently declined. In the third quarter of 2019, the level had almost reached the historical low observed in 2016.