Paper analyses eurozone consumers’ inflation expectations

Eurozone consumers’ medium-term inflation expectations are influenced by short-term views, major shocks and trust in monetary policy, a working paper published by the Bank of Finland finds.

Ewa Stanisławska and Maritta Paloviita use the European Central Bank’s consumer expectations survey, a new monthly online survey of people living in the eurozone. In Medium- vs short-term consumer inflation expectations: evidence from a new euro area survey, they concentrate on data from six eurozone countries.

They find evidence that, in these countries, “consumers adjust medium-term inflation views in response to changes in short-term inflation expectations”. To a lesser degree, they find, consumers also change their medium-term expectations according to changes in their views of current inflation.

Major economic events and trust in the central bank were important factors in shaping inflation expectations in the countries the authors examined. The onset of the Covid-19 pandemic also had a significant effect, contributing to increased expectations of inflation among consumers.

“Consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust,” the paper says.  

Analysing how consumers change their medium-term inflation expectations is “very useful for medium-term oriented monetary policy”, the authors argue.

An ongoing assessment of how consumer expectations respond to various factors is “especially important in the low inflation environment”, they say. “Persistently low inflation rates may change the way consumers form their expectations.”