In this paper we analyze the forecasting ability of the term structure with respect to future inflation in Germany. In contrast to previous studies, we find evidence in favor of a nonstationary term premium. Assuming that the nonstationary part of the term premium can be approximated by an observable factor, we derive testable restrictions which cannot be rejected for German data. In an out-ofsample forecasting experiment, our model outperforms rival models which assume a constant term premium. Nevertheless, we find that the forecasting ability of the term structure is limited while the real interest rate is revealed as a good predictor for future inflation rates.