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Making sense of consumer inflation expectations: the role of uncertainty

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  • Reiche, Lovisa
  • Meyler, Aidan

Abstract

Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand what they are and how they are formed. In this paper we introduce the (un)certainty channel as means to shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. These include the apparent overestimation of inflation by consumers as well as the negative correlation observed between the economic outlook and inflation expectations. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with socio-demographic characteristics and economic sentiment. JEL Classification: D11, D12, D84, E31, E52

Suggested Citation

  • Reiche, Lovisa & Meyler, Aidan, 2022. "Making sense of consumer inflation expectations: the role of uncertainty," Working Paper Series 2642, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222642
    Note: 496790
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    1. Paolo del Giovane & Silvia Fabiani & Roberto Sabbatini, 2009. "What's Behind "Inflation Perceptions"? A Survey-Based Analysis of Italian Consumers," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 68(1), pages 25-52, April.
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    5. Michael Ehrmann & Damjan Pfajfar & Emiliano Santoro, 2017. "Consumers' Attitudes and Their Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 225-259, February.
    6. Francesco D'Acunto & Daniel Hoang & Maritta Paloviita & Michael Weber, 2019. "Cognitive Abilities and Inflation Expectations," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 562-566, May.
    7. Francesco D’Acunto & Ulrike Malmendier & Juan Ospina & Michael Weber, 2019. "Exposure to Daily Price Changes and Inflation Expectations," NBER Working Papers 26237, National Bureau of Economic Research, Inc.
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    9. Brachinger, Hans Wolfgang, 2008. "A new index of perceived inflation: Assumptions, method, and application to Germany," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 433-457, August.
    10. Ueno, Yuko & Namba, Ryoichi, 2014. "Heterogeneity and Biases in Inflation Expectations of Japanese Households," CIS Discussion paper series 614, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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    Citations

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    Cited by:

    1. Lovisa Reiche, 2023. "That’s what she said: An Empirical Investigation on the Gender Gap in Inflation Expectations," Economics Series Working Papers 1025, University of Oxford, Department of Economics.
    2. Jonas Dovern & Alexander Glas & Geoff Kenny, 2023. "Testing for Differences in Survey-Based Density Expectations: A Compositional Data Approach," CESifo Working Paper Series 10256, CESifo.
    3. Michal Marencak, 2023. "State-dependent inflation expectations and consumption choices," Working and Discussion Papers WP 10/2023, Research Department, National Bank of Slovakia.
    4. Raquel Ayestarán & Juan Infante & Juan José Tenorio & Luis Alberiko Gil-Alana, 2023. "Evidence of Inflation Using Harmonized Consumer Price Indices in Some Euro Countries: France, Germany, Italy, and Spain, along with the Euro Zone," Mathematics, MDPI, vol. 11(10), pages 1-12, May.
    5. Stefano Neri & Guido Bulligan & Sara Cecchetti & Francesco Corsello & Andrea Papetti & Marianna Riggi & Concetta Rondinelli & Alex Tagliabracci, 2022. "On the anchoring of inflation expectations in the euro area," Questioni di Economia e Finanza (Occasional Papers) 712, Bank of Italy, Economic Research and International Relations Area.
    6. Daria Minina & Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2024. "The effect of information on consumer inflation expectations," Working Papers 810, DNB.

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    More about this item

    Keywords

    consumers; expectations; inflation; uncertainty;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - 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

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