Nominal interest rates fail to predict inflation due to real effects.
The study looked at how interest rates can predict inflation by analyzing data on real interest rates and consumption. The researchers found that the term structure of interest rates is mainly influenced by real interest rates, not just inflation or risk premiums. This means that the difference between long and short-term interest rates doesn't reliably predict future inflation changes. To better predict inflation, the study suggests adjusting interest rate spreads for real interest rate effects.