In recent years, central banks in many countries have increasingly focused on the goal of price stability. In pursuing this goal, central banks need information about the degree of inflationary pressures in the economy, and a natural place to look for this information is the term structure of interest rates, or the yield curve. The term structure of interest rates has long been of interest to monetary policy makers and their advisers. The market determines different yields on investments of different maturities; of considerable importance is the gap between interest rates on short-dated investments and those with longer maturities. If these interest rates are plotted against unexpired maturity, the result is the yield curve, and of importance is its slope (which is the difference between nominal interest rates on longer-dated bonds and shorter-dated securities).The transmission of monetary policy is conventionally viewed as running from short-term interest rates managed by central banks to the longer-term rates that influence aggregate demand. A central bank's influence over longer-term interest rates comes from the fact that the market determines these as the average expected level of short-term rates over the relevant horizon (abstracting from a term and default risk premium). Working in the other direction, the long-term bond yield contains a premium for expected inflation, and thus serves as an indicator of the credibility of a central bank's commitment to low inflation. That alone merits the attention of central bankers to significant bond yield movements. A related but separate issue is the extent to which bond yields actually have proven to be a good forecaster of future inflation trends. Accurate projections of inflation are a key element in the conduct of monetary policy, and it is useful to extract the information content of the yield curve. In 1998, when the slope of the South African yield curve was inverted, some analysts argued that the curve was signalling a sharp slowdown in economic activity. Towards the end of 1999, when the yield curve was positive and steep, some economists were predicting a significant acceleration in economic activity. It is sometimes difficult to read unambiguous signals from these changes in the shape of the yield curve. In this regard, the Governor of the South African Reserve Bank, Mr T T Mboweni (1999), pointed out that one should keep in mind that expected inflation is only one factor determining nominal interest rates. An increase in expected inflation should lead to a steepening of the yield curve, but a steeper yield curve does not necessarily signal a rise in expected inflation.This paper relies essentially on the expectations theory in which long-term interest rates are affected by long-term inflationary expectations (which in turn are affected by the commitment of the central bank to price stability). Based on this approach, the four variables used in the analysis are the nominal yield on 10-year South African government bonds, inflation (excluding changes in food and energy prices), the nominal securities repurchase rate of the Reserve Bank, and the output gap, indicating the extent of capacity utilisation in the economy. Theoretically, other determinants might also explain the term structure. An important one is short run movements in the real interest rate that affect the bond yield, without a change in expected inflation.In this study, the Fisher (1930) relation between the inflation rate and the nominal bond yield is empirically investigated, using co-integration and error-correction modelling techniques. The objective is to extract from the yield curve information about future inflation. The methodology is based on the Johansen procedure to determine the existence of a co-integration relationship. Using South African data from the first quarter of 1985 to the second quarter of 1999, this article attempts to extend the existing literature by presenting a more rigorous econometric analysis of the information about future inflation contained in the term structure of i