Term structure accurately predicts inflation, struggles with real and nominal yields.
The study developed a model to understand how interest rates in the UK are affected by changing expectations of future yields and inflation. The model showed that short-term changes in expected yields are hard to predict due to varying risk factors, but inflation expectations over the next few years can be accurately reflected by changes in real and nominal yields. Over longer periods, the term structures closely follow expectations of future yields, but not future inflation.