The significantly positive coefficient for the lagged inflation indicates that the current year's bank lending rate incorporates previous year's inflation as an expected inflation premium
for the current year.
To the extent that small firms operate in more competitive environments, they may have less pricing power than larger firms, and hence may be more exposed to inflation risk, and hence command an inflation premium
relative to larger firms.
These returns are combination of real return, inflation premium
, risk premium, default risk premium and maturity risk premium.
Subsequently, we used the method of extracting the Durham premium (2007) to estimate the inflation premium
and extract an implicit measure of inflation (BEIR) that is less distorted.
Nevertheless, the scope for steepening seems limited given the MENA tensions and the associated short-term risk and inflation premium
. We still expect a flattening over the medium term.
In exchange for extending more loans to a federal government that has become a riskier borrower, lenders will ask for an inflation premium
. American families and businesses will pay those prices, further hindering economic growth.
The adjustment assumes the inflation risk premium is constant over time, when it seems plausible that inflation uncertainty (and hence the inflation premium
) has recently increased.
What has mostly flowed is the supply of dollars, and so some part of oil's increase should be called the Alan Greenspan-Ben Bernanke inflation premium
. To the extent higher oil prices slow economic growth, they also defeat the stated purpose of the Fed's rate cuts.
Variants of the low inflation premium
story appear in:
The Fed has spent most of the last 25 years eliminating the expected inflation premium
from interest rates.
For this reason, investors demand a higher return (in the form of an inflation premium
) as protection against inflation-related risks posed by traditional debt securities.
* plus the inflation premium
for an investment horizon of m periods