The question states the current inflation rate as well as the long term inflation expectation. To find the expected return on the 1 yr US Treasury Note, why can we not use the current inflation expectation as opposed to the long term expectation? This note will mature in one year, so isn’t the current inflation expectation more applicable? Please explain! Thanks!
your wording is slightly off. its the current inflation rate we cannot use as its irrelevant when forming investment decisions. you always want to look forward and therefore you want the long term inflation expectation. even if the t-bill matures in one year, it is reasonable to assume you will roll over the 1 year t-bill infinatly (thus long term inflation is important).