Question

What conclusion about inflation expectations would you reach if you evidenced an inverted yield curve?

Answer 1

When we see an inverted yield curve, it means that the rate of interest on short term bonds is more than the rate of interest on long term bonds. It means that the investors or lenders expect higher return for short term bonds.
When investors require higher return in short term compared to long term, it could mean that the market is expecting lower inflation in future and investors require higher rate of return in short term to compensate for the short term inflation.
It means, an inverted yield curve shows that the investors are expecting lower inflation rate in future.