New research sheds light on the link between inflation and uncertainty
What truly drives long-term inflation uncertainty? New research shows that it is not short-term shocks, but macro-financial factors such as political uncertainty, market volatility and yield spreads that shape the picture. In the interview, Quoniam researcher Dr Tamas Barko explains why stable communication is crucial — and which long-standing economic assumptions are now being put to the test.
Key takeaways
-
Long-term uncertainty matters most: When inflation uncertainty adapts to real-world conditions, short-term spikes become less important.
-
Macro-financial factors drive the story: Policy uncertainty, yield spreads, and market volatility shape long-run inflation uncertainty.
-
Stable communication is key: Transparent and coordinated policy actions can help anchor long-term expectations and reduce inflation risks.
Dr Tamas Barko from Quoniam’s Research team co-authored a paper with Chaoyi Chen (Hungarian National Bank) and Olivér Nagy (Eötvös Loránd University) titled “Inflation and Inflation Uncertainty: Evidence from GARCH-MIDAS-in-Mean Modelling” which was published in Financial and Economic Review. The study takes a fresh look at how inflation and uncertainty influence each other, introducing a new model that separates short-term shocks from long-term drivers such as market volatility, yield spreads, and policy uncertainty.
Can you give us the elevator pitch for your paper?
Sure! We wanted to understand how inflation interacts with the uncertainty surrounding it and whether that relationship changes over time. Earlier studies assumed that the long-term part of uncertainty stays constant, but that’s not how the world works. Our model allows it to move with real economic and financial conditions. When we tested this on UK data from 1972 to 2023, we found that long-term uncertainty is heavily shaped by macro-financial factors like policy uncertainty and market volatility.
And interestingly, while inflation uncertainty tends to push inflation higher, the reverse effect — inflation creating more uncertainty — seems weaker than previously thought once you look at it through this lens.
Once you let long-term uncertainty move with real economic conditions, the classic link between inflation and uncertainty almost disappears.
Dr Tamas Barko, Quoniam Asset Management
Anything that surprised you during the research?
Yes, a couple of things. First, we discovered that the famous “inflation creates uncertainty” story doesn’t hold up once you let long-term uncertainty vary with market and policy conditions. It’s like peeling back layers — some effects disappear when you model the system more realistically.
Also, major events such as the VAT cut during the financial crisis or Covid-19 really shift the picture. It shows how quickly structural breaks and policy responses can change the dynamics of inflation and uncertainty.
What are the main takeaways for policymakers?
Our findings point toward the importance of anchoring long-term uncertainty. That means clear communication, predictable policy rules, and strong coordination between fiscal and monetary authorities. If the long-term piece is stable, short-term inflation spikes become less worrisome. We even suggest building a real-time dashboard of macro-financial indicators — something policymakers could use to track and manage uncertainty proactively.
And on a lighter note — which famous economist would you have loved to debate this with?
Probably Milton Friedman. His view that “inflation breeds uncertainty” was groundbreaking at the time — I’d love to see what he’d make of modern data and models. I suspect he’d have a few lively counterarguments!
