Revisiting the inflation perception conundrum

Households' inflation perceptions and expectations play a key role in many dynamic macroeconomic and monetary models and are important for the ability of central banks to reach their objective of price stability. This paper revisits the issue of overestimation bias in inflation perceptions and expectations based on new and unique microdata from the Danish part of the EU-Harmonised Consumer Expectations Survey linked to rich household-level data from administrative registers. The analysis shows that accounting for even several of the household characteristics and social gradients usually addressed in the literature is far from sufficient to explain the inflation perception bias. Furthermore, we find that respondents participating in the survey more than once tend to be persistent in their degree of perception bias and that overpessimistic households have larger perception bias than other households. This indicates that inflation perception bias is related to fundamental personality traits. Finally, households' expectations of the future inflation level tend to be mean reverting and associated with the same types of bias as inflation perceptions.     

What determines households inflation expectations? Theory and evidence from a household survey

The purpose of the present paper is to study how households form inflation expectations using a novel survey dataset of Italian households. We extend the existing ‘inattentiveness’ literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. We also consider both the short- and long-run dynamics as households update their inflation expectations. While we find clear distinctions between the various demographic groups behavior, households tend to absorb professionals forecast. The short-run dynamics also indicate they not only overreact when updating their expectations but also adjust asymmetrically to any perceived momentum change of future inflation.     

Fed speak on main street: Central bank communication and household expectations

Central banks emphasize the use of communication as a tool of monetary policy. As central banks increasingly recognize that low public informedness limits their ability to communicate with the general public, several have begun to explicitly tailor their communication strategies for a broader audience. Most research focuses on central bank communication with financial markets, but several recent strands of literature address aspects of communication with households. I survey the literature addressing the rationales and efficacy of central bank communication with households, supplementing this with new evidence from an assortment of consumer survey data. I draw from the literature on rational inattention, financial literacy, and political communication to suggest explanations for limited household receptiveness to central bank communications. Finally, I focus on one specific aim of central bank communication, which is to anchor inflation expectations. Previous literature finds that the announcement of an explicit inflation target helps anchor expectations among financial market participants. Using U.S. consumer survey data, I show that consumers’ expectations are imperfectly anchored and that the anchoring of more informed consumers’ expectations increased more than the anchoring of less informed consumers’ expectations following the Fed’s announcement of a 2% inflation target.     

Decomposing household,professional and market forecasts on inflation: a dynamic factor model analysis

A dynamic factor model with stochastic volatility is used to investigate the relationships between three alternative measures of inflation expectations. The results show evidence of both a common time-varying trend and a common transitory component between inflation and short-term inflation expectations from households, professionals and markets. While the common time-varying trend has declined in both level and volatility since the early 1980s, it was found that consumer expectations are disproportionately influenced by the visibility of prices of select few goods. Roughly speaking, a 1% point increase in food and energy prices leads to about 1/3% point increase in consumer forecasts of inflation. In terms of policymaking, this finding suggests that stability in highly visible prices can moderate inflation in a meaningful way.     

Inflation literacy and inflation expectations: Evidence from Austrian household survey data

Inflation expectations are known to be quite heterogeneous across agents. We investigate whether this heterogeneity is primarily due to differences in people’s understanding of the inflation process and of the goals and intentions of the central bank. Using micro data from a survey conducted among 2000 Austrian households, we construct an indicator of “inflation literacy” from several questions on people’s knowledge about different aspects of inflation. We find that this indicator helps explain both the level and the uncertainty of inflation expectations: Households with relatively higher levels of inflation literacy tend to have lower and more accurate short-term and long-term inflation expectations. Interestingly, however, they are less certain about their inflation expectations than people with lower levels of inflation literacy. We also find that people’s trust in the central bank and in its ability to maintain price stability significantly dampens their inflation expectations.     

Quantification and characteristics of household inflation expectations in Switzerland

Inflation expectations are a key variable in conducting monetary policy. However, these expectations are generally unobservable and only certain proxy variables exist, such as surveys on inflation expectations. This article offers guidance on the appropriate quantification of household inflation expectations in the Swiss Consumer Survey, where answers are qualitative in nature. We apply and evaluate different variants of the probability approach and the regression approach; we demonstrate that models that include answers on perceived inflation and allow for time-varying response thresholds yield the best results; and we show why the originally proposed approach of Fluri and Spörndli (1987) has resulted in heavily biased inflation expectations since the mid-1990s. Furthermore, we discuss some of the key features of Swiss household inflation expectations, i.e. the fact that there has been a shift in expectation formation since 2000 (expectations are better anchored and less adaptive, and there is lower disagreement of expectations). We suggest that this may be linked to the Swiss National Bank’s adjustment of its monetary policy framework around this time. In addition, we outline how expectation formation in Switzerland is in line with the sticky information model, where information disseminates slowly from professional forecasters to households.     

Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations

Differences in spending patterns and in price increases across goods and services lead to the unequal inflation experiences of households (called inflation inequality). These differences then cause disagreements in inflation expectations and eventually have a significant effect on households’ asset allocation and consumption decisions. The asset allocation model in this paper explains how inflation experiences affect household investment and consumption through corresponding inflation expectations, which are characterized by long-term expected inflation, the impact coefficient of the expected inflation and the correlation between expected inflation and the risky return. Using China's economic data, the empirical results show that significant differences in inflation expectation arise from income gap, regional inequality, different inflation measures and economic sector spending differences. Using the estimated coefficients, the calibration results have policy implications that households need more financing channels to resist inflation, especially in rural areas and in the raw material sector.     

THE FORMATION OF CONSUMER INFLATION EXPECTATIONS: NEW EVIDENCE FROM JAPAN'S DEFLATION EXPERIENCE

Using a new data set, we investigate the relationship between the inflation experience and expectations of households in Japan, focusing on the post-1995 deflationary era. Our first finding is that inflation expectations increase with age. Second, we find that measured inflation rates also increase with age, although age and inflation expectations continue to exhibit a positive correlation even after controlling for the household-level inflation rate. Analysis suggests that the correlation between age and inflation expectations is driven largely by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on inflation expectations.     

Inflation expectations of Brazilian consumers: an analysis based on the FGV survey

ABSTRACT

An accurate assessment of inflation expectations is crucial for the management of monetary policies. However, expectations are not directly observed and are hence normally inferred either from the interest rate structure or from surveys of professional forecasters. Alternatively, a direct measure may be obtained from consumer surveys. The aim of this paper is to study the formation of inflation expectations in Brazil, using a novel dataset based on the FGV/IBRE consumer survey. Basing our model on the rational inattention hypothesis, we find that individual heterogeneity plays a very significant role in shaping individual expectations; also, Brazilians adjust expectations to current inflation and to a fixed reference value, while professional forecasts do not play a very relevant role.     

Assessing the (de-)anchoring of households’ long-term inflation expectations in the US

Well-anchored inflation expectations play an important role in the achievement of price stability. The (de-)anchoring of long-term inflation expectations in the US has been under debate since the sub-prime crisis. This paper assesses and explains the evolution of the degree of (de-)anchorage of households’ long-term inflation expectations in the US during the period of 1990 to 2019, in a time-varying framework. We find the long-term inflation expectations to be de-anchored during the entire study period. The de-anchorage was greater in the first half of the 1990s. Subsequently, it has declined but has not yet anchored. An increase in inflation perception reduces the degree of de-anchorage in a (persistently) low-inflation perception period, whereas it causes a rise in the degree of de-anchorage when inflation perception is around its long-term average or is persistently high. Further, a rise in economic policy uncertainty also increases the de-anchorage of households’ long-term inflation expectations. This suggests that the Federal Reserve System (Fed) may find it beneficial to pay more attention to households’ inflation perception.     

Copper Price Behaviour and the London Metal Exchange

This paper examines how variables which describe the expectations of consumers can contribute to the explanation of observed expenditure patterns and how measured series of such expectations can be used in a forecasting model to improve the prediction of short-term consumer expenditures. The expectations data are based on the British Market Research Bureau's Financial Expectations Survey and the respective series that are derived are tested in correlation and regression exercises against quarterly aggregate consumer expenditure series. The exercise finds that the information contained in these financial expectations has significant value for predicting expenditures in the period 1 to 12 months ahead. The forecasting models based on the expectational data generally perform as well as those based on conventional economic variables and the leading indicator properties of the expectations, combined with their rapid availability, enhance their value as a potential source of forecasting information.     

Quantitative versus qualitative measures of price expectations: The evidence from Australian consumer surveys

This letter analyses price expectations data derived from the quarterly Australian Survey of Consumers. The survey asks both qualitative and quantitative price expectations questions. The information loss arising from using the more readily available qualitative based series as approximations to the quantitative series is assessed. Qualitatively based series are found to greatly exaggerate changes in consumer price expectations in times of high inflation.     

通货膨胀预期形成、锚定:基于消费者和经济学家预期的分析

本文在区分居民通货膨胀预期和经济学家通货膨胀预期的基础上,研究通货膨胀预期形成和锚定的特点,发现经济学家通货膨胀预期呈现不规则的正态分布,往往在通货膨胀实际值较低时更多的经济学家做出偏高预期.居民通货膨胀预期显示低收入阶层对物价上涨更为敏感,大城市居民通货膨胀预期最敏感.总体如果半数以上的人认为物价上涨,则出现恶性通货膨胀的概率增加.发现居民物价预期指数是通货膨胀的格兰杰成冈,但经济学家通货膨胀预期却不必然导致通货膨胀发生.国际比较发现英国居民物价预期指数显著高于中国.锚定通货膨胀预期的关键是防止通货膨胀预期加速形成,防止中央银行陷入通货膨胀预期陷阱,为此需要单一化中央银行职责,建立通货膨胀预期中期监测机制,竖立中央银行反对通货膨胀的信任度.     

How anchored are inflation expectations in EMU countries?

Anchored inflation expectations help stabilize inflation. Previous results indicate that monetary policy has been effective in breaking the link between actual and expected inflation at the euro area level. In this paper we examine whether this is also true at the national level. We define the ‘disconnect’ between inflation and inflation expectations and then proceed to examine the extent to which this disconnect exists for a number of euro area countries. Our findings suggest that for some countries, their own inflation experiences still affect national inflation expectations, and certainly more by comparison to how they affect the aggregate euro area level.     

公众预期、需求冲击与通货膨胀——兼论通胀持久性的地区差异

本文基于具有微观基础的混合式新凯恩斯菲利普斯曲线模型,利用1985-2009年的省际面板数据,分析了预期因素、需求冲击及产出缺口与通货膨胀之间的动态过程及其地区差异。研究发现：总体上,无论是适应性预期还是理性预期对当期通货膨胀都有较强的推动作用;作为需求冲击的居民消费支出、固定资本形成以及产出缺口对通货膨胀都具有正向拉动作用。从通货膨胀持久性的地区差异上看,西部地区的通胀持续性最长,中部最短。     

Measuring inflation expectations: a survey data approach

Measures of expected inflation from consumer surveys are derived using a modification of the Carlson-Parkin probability approach, which does not assume unbiasedness of expectations, makes use of survey data on expected future as well as perceived past price developments and allows for time varying response thresholds. We apply this method to the normal, central-t and noncentral-t distributions, thereby investigating the effects of nonnormal peakedness and asymmetry. We find that the effects on expected inflation of the former are small and of the latter are substantial, without increasing the accuracy of the expectations, however. Expected and actual inflation show substantial persistence, and, for most of our expectations measures, are cointegrated. Furthermore, the forecast error is stationary, implying weak-form rationality. The co-movement of currently observed expected inflation measures and the unobserved 12-months-ahead inflation rate is of interest for policy makers, for example in the direct inflation targeting strategy. Notwithstanding this, caution is warranted in using them as information variables because the inflation expected by consumers is no causal determinant of actual future inflation.     

The information content of market-based measures for the long-term inflation expectations of professionals: evidence from a midas analysis

Long-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This article investigates the daily information content of market-based measures, such as inflation-linked swaps and breakeven inflation rates, for the next survey outcome. Using a mixed data sampling approach, we find that professionals account for the daily dynamics of market-based measures when they submit their long-term inflation expectations. We propose a daily indicator of professionals’ inflation expectations that outperforms alternative indicators that ignore the high-frequency dynamics of market-based measures. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.     

Inflationary expectations with heterogeneous information: ‘generational expectations’

This paper proposes a modified theory of expectation formation. The hypothesis of generational expectations (GE), unlike the widely accepted hypothesis of rational expectations, assumes that agents from their inflationary expectations using the most economical information set – their personal experience with inflation. The GE hypothesis incorporates the realistic assumptions of heterogenous information sets and bounded rationality. Several alternative expectational hypotheses are compared in terms of properties of inflation forecasts and estimates of a version of natural-rate aggregate supply functions and age-group-specific Phillips curves. It is shown that GE performs just as well or even better than other methods.     

Subjective probabilistic expectations,household air pollution,and health: Evidence from cooking fuel use patterns in West Bengal,India

An increasing number of empirical studies have investigated the determinants of cooking fuel choice in developing countries, where health risks from household air pollution are one of the most important issues. We contribute to this stream of literature by examining individuals’ subjective probabilistic expectations about health risks when using different types of fuel and their role in cooking fuel usage patterns. We also explore how these patterns, in turn, are associated with health status. Using data collected from 557 rural Indian households, we find that subjective probabilistic expectations of becoming sick from dirty fuel usage are negatively and significantly associated with the fraction of days of dirty fuel usage in households. Concurrently, dirty fuel usage and self-reported health status of the individual being sick are also significantly correlated. We then conduct a policy simulation of information provision regarding the health risks of dirty fuel usage. Our simulation demonstrates that although the provision of information results in statistically significant changes in households’ cooking fuel usage patterns and in individuals’ health status, these changes may be small in size.     

Would helicopter money be spent? New evidence for the Netherlands

According to some economists, central banks should use ‘helicopter money’ to boost inflation (expectations). Based on a survey among Dutch households, we examine whether respondents would spend the money received via such a transfer. Our results show that respondents expect to spend about 30% of the transfer and that helicopter money would hardly affect inflation expectations. Furthermore, whether transfers come from the central bank or the government makes no difference. Finally, our results suggest that the effect of helicopter money on public trust in the ECB is ambiguous.