Inflation expectations of Austrian households and firms amid high inflation

Inflation expectations are a key indicator of monetary policy as they can be used to predict the future evolution of inflation and help central banks assess the credibility of their policies. Furthermore, according to economic theory, they determine the real interest rate, thus affecting agents’ consumption and investment decisions. We analyze novel and existing survey data on Austrian firms’ and households’ inflation expectations to better understand the formation and the determinants of these expectations, especially in the current high-inflation environment. We find the following five stylized facts: We confirm (1) earlier evidence that households’ and firms’ inflation expectations are rather similar, and that there is less disagreement among firms than among households. Furthermore, (2) household and firm characteristics that likely influence inflation expectations, e.g. education and age of households and size of firms, point to varying degrees of how informed, rational and experienced respondents are. For firms, we provide evidence that (3) sectoral characteristics, i.e. the extent to which firms are exposed to energy price fluctuations and supply chain pressures, affect inflation expectations as well. Another finding is that (4) overall, firms’ expectations of aggregate inflation are somewhat correlated with their own expected selling prices, but firm- or sector-specific factors and cost-related price developments may shape firms’ price setting more. Lastly, differences between the current and previous survey waves show that (5) households may have become more rationally attentive during the high-inflation period, as indicated by a decrease in their subjective uncertainty about inflation expectations.