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Lovisa Reiche

21 September 2021
OCCASIONAL PAPER SERIES - No. 264
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Abstract
This paper summarises the findings of the Eurosystem’s Expert Group on Inflation Expectations (EGIE), which was one of the 13 work streams conducting analysis that fed into the ECB’s monetary policy strategy review. The EGIE was tasked with (i) reviewing the nature and behaviour of inflation expectations, with a focus on the degree of anchoring, and (ii) exploring the role that measures of expectations can play in forecasting inflation. While it is households’ and firms’ inflation expectations that ultimately matter in the expectations channel, data limitations have meant that in practice the focus of analysis has been on surveys of professional forecasters and on market-based indicators. Regarding the anchoring of inflation expectations, this paper considers a number of metrics: the level of inflation expectations, the responsiveness of longer-term inflation expectations to shorter-term developments, and the degree of uncertainty. Different metrics can provide conflicting signals about the scale and timing of potential unanchoring, which underscores the importance of considering all of them. Overall, however, these metrics suggest that in the period since the global financial and European debt crises, longer-term inflation expectations in the euro area have become less well anchored. Regarding the role measures of inflation expectations can play in forecasting inflation, this paper finds that they are indicative for future inflationary developments. When it comes to their predictive power, both market-based and survey-based measures are found to be more accurate than statistical benchmarks, but do not systematically outperform each other. Beyond their role as standalone forecasts, inflation expectations bring forecast gains when included in forecasting models and can also inform scenario and risk analysis in projection exercises performed using structural models. ...
JEL Code
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
23 March 2021
ECONOMIC BULLETIN - ARTICLE
Economic Bulletin Issue 2, 2021
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Abstract
Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand their nature and how they are formed. This article shows that inflation (un)certainty is a channel that can shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. It helps explain why these may be higher than actual inflation. This is because, in a situation of uncertainty, many consumers report in rounded numbers, often leading them to quantitatively overestimate inflation. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with sociodemographic characteristics and economic sentiment. Furthermore, the uncertainty channel may also explain the negative correlation observed between the economic outlook and inflation expectations.
JEL Code
D11 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Theory
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy