Inflation expectations estimates are among the important indicators considered when formulating monetary policy which tries to meet an inflation target range. These estimates include primarily (1) inflation expectations for the next 12 months, calculated from the prices of CPI (Consumer Price Index)-indexed and unindexed government bonds, and (2) forecasts for the next 12 CPIs as formulated by professional forecasters. This study outlines how these two expectations estimates are affected by deviations caused by the seasonality inherent in the CPI. The first derives from the effect of seasonality on the pricing of CPI-indexed financial assets, including CPI-indexed bonds. The second derives from limited internalization of seasonal factors when forecasters' projections are formulated. 

We find that seasonal factors have a strong effect on the pricing of CPI-indexed bonds and on inflation expectations and professional forecasts. However, these factors are not identical to the factors published by the Central Bureau of Statistics (CBS), and are generally smaller in their absolute value. This finding shows that bond market participants in Israel, as well as professional forecasters, do not use the full information inherent in seasonal fluctuations of the CPI as they formulate their predictions and expectations. Fully taking into account the seasonal factors will improve the CPI-indexed bonds and the estimates of inflation expectations.