The inflation term premium is the extra yield investors demand for bearing inflation uncertainty over a bond's life, beyond expected average inflation. It is the inflation-specific slice of the broader nominal term premium, compensating holders for the risk that realized inflation diverges from forecasts.
A nominal yield decomposes into expected real rates, expected inflation, and risk premia; the inflation term premium is the portion of the premium specifically compensating for uncertainty about future inflation. It is unobservable and must be estimated, typically by differencing nominal and inflation-linked (TIPS) curves or via affine term-structure models that separate expectations from risk compensation.
In the post-2022 regime, a positive inflation term premium has re-emerged after a decade near zero, as markets price two-sided inflation risk from tariffs, fiscal expansion, and supply shocks — meaning bond yields embed compensation for inflation uncertainty itself, not just the central forecast.
When the Ledger noted the bond market was flagging the inflation term premium rather than the war premium as the binding constraint, the point was diagnostic: a Middle East oil shock raises the geopolitical risk premium transiently, but a structurally higher inflation term premium lifts long-end yields persistently. If 10-year breakevens sit at 2.3% but the 10-year nominal yield carries an extra ~30-50bp of estimated inflation risk compensation, the term premium — not the spot war headline — is what anchors long rates.
Nominal yield ≈ expected real rate + expected inflation + real term premium + inflation term premium