A closer look at consumers' inflation expectations – evidence from the ECB’s Consumer Expectations Survey

The strong increase in euro area HICP inflation over the past 18 months has placed additional emphasis on monitoring and understanding the behaviour of consumers’ inflation expectations. Data from the ECB’s Consumer Expectations Survey show that, after HICP inflation rose above 2% in July 2021, consumers’ inflation perceptions and expectations started to move upwards too. However, this rise in shorter-term (one-year ahead) inflation expectations was much more pronounced than that of more medium-term (three-years ahead) expectations and the term structure of consumers’ inflation expectations remained strongly downward sloping. There is some evidence that the responsiveness of inflation expectations to inflation perceptions has increased recently, but it remains noticeably lower for medium-term inflation expectations. Consumers’ uncertainty surrounding their inflation expectations has also grown. Overall, the upward movement in expectations, the increase in uncertainty surrounding them and rising sensitivity of medium-term expectations to perceived current inflation all call for continued close monitoring and analysis. JEL Classification: E31, E52, D84