When long-term inflation-linked swap (ILS) rates for the euro area peaked in summer 2023, some observers expressed concerns that ILS rates reflected not only inflation compensation, but also non-fundamental “technical” factors. Such factors potentially reduced the usefulness of ILS rates in terms of gauging inflation expectations and risks. This box contributes to that discussion using a novel econometric approach, suggesting that there is, on average, little scope for technical factors to affect ILS rates. At the same time, the results also suggest that the signal from ILS rates may have been distorted somewhat during episodes of extremely high market volatility (e.g. the global financial crisis, the start of the COVID-19 pandemic and the aftermath of the Russian invasion of Ukraine). However, those distortions were short-lived and mainly affected short-term ILS rates, while longer maturities appear to have been less affected.
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