A European Central Bank working paper finds that inflation risk premia in the euro area and United States are higher when news coverage attributes inflation predominantly to supply factors and lower when it emphasizes demand factors. The relationship holds across two, five and 10-year maturities after controlling for economic activity and financial market uncertainty. The authors used natural language processing to extract causal inflation narratives from Financial Times and Wall Street Journal articles between 2005 and 2024. The relationship was strongest when U.S. investor risk aversion and euro-area inflation volatility were higher, particularly at shorter and medium maturities. Newspaper narratives retained explanatory power beyond macroeconomic indicators, professional forecaster surveys and narratives generated by large language models, with commodities and energy among the supply factors most closely associated with higher risk premia.
2026-09-21European Central Bank
European Central Bank working paper links supply-driven inflation narratives to higher inflation risk premia
A European Central Bank working paper finds that supply-driven inflation narratives are associated with higher inflation risk premia in the euro area and United States, while demand-driven narratives correspond with lower premia. The relationship holds across multiple maturities and is not explained away by standard macroeconomic, survey or large language model-based measures.