This paper shows that long-term inflation expectations have become de-anchored from the ECB Governing Council's inflation aim. The long-term expectations in the ECB's Survey of Professional Forecasters have not returned to the levels that prevailed before the 2013-14 period of disinflation, and their distribution is still skewed towards lower inflation levels. Moreover, long-term expectations have become sensitive to short-term ones and to negative inflation surprises. Forecasters who participated in most of the surveys are the most responsive to short-term developments in inflation.

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We introduce a time-series model for a large set of variables in which the structural shocks identified are employed to simultaneously explain the evolution of both the level (conditional mean) and the volatility (conditional variance) of the variables. Specifically, the total volatility of macroeconomic variables is first decomposed into two separate components: an idiosyncratic component, and a component common to all of the variables. Then, the common volatility component, often interpreted as a measure of uncertainty, is further decomposed into three parts, respectively driven by the volatilities of the demand, supply and monetary/financial shocks. From a methodological point of view, the model is an extension of the homoscedastic Multivariate Autoregressive Index (MAI) model (Reinsel, 1983) to the case of time-varying volatility. We derive the conditional posterior distribution of the coefficients needed to perform estimations via Gibbs sampling. By estimating the model with US data, we find that the common component of volatility is substantial, and it explains at least 50 per cent of the overall volatility for most variables. The relative contribution of the demand, supply and financial volatilities to the common volatility component is variable specific and often timevarying, and some interesting patterns emerge.

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Summary Global developments play an important role for domestic inflation rates. Earlier literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, although it is clearly relevant both from a policy point of view and for structural analysis and forecasting. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country‐specific components. We find that inflation volatility is indeed important, and a substantial fraction of it can be attributed to a global factor that is also driving inflation levels and their persistence. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies. Finally, we show that the point and density forecasting performance of the model is good relative to standard benchmarks, which provides additional evidence on its reliability.