Since then, inflation volatility has stabilised at this very low level, in spite of major inflationary shocks. And the average volatility of long-term consensus inflation expectations has also declined substantially, by four-fifths, from almost 0.5 percentage point in the 1990s to around 0.1 percentage point in recent years. Lower volatility of actual and expected inflation reduces consumer and investor uncertainty and thereby enhances welfare.
Stable inflation expectations and a high degree of confidence on the part of financial market participants in monetary policy should, over time, also lead to a reduction in the volatility of longer-term interest rates, and thus also to lower risk premia.