Exploring Recent Changes in Euro Area Consumer Inflation Expectations

Central banks typically pay close attention to economic agents’ expectations about inflation at medium-term horizons. This is because such indicators provide information on the extent to which agents perceive that the central bank will be able to maintain price stability over the medium term. This article exploits the richness and flexible design of the ECB’s Consumer Expectations Survey (CES) to explore recent changes in consumers’ medium-term inflation expectations. The data suggest that throughout 2022, these expectations became less well-anchored around the ECB’s 2% inflation target. By taking the necessary actions and actively communicating how monetary policy contributes to stabilizing future inflation, the ECB can help strengthen public trust and prevent recent price and cost shocks from having longer-lasting effects on inflation expectations.

Cross-sectional Patterns and Scale of Revisions

Chart 1 shows the aggregate patterns in inflation expectations and their sensitivity to news about inflation. The left-hand panel depicts population-weighted survey responses about the expected price change. The median is computed based on a symmetric linear interpolation that accounts for the responses’ rounding. Mean values are winsorized at the 2nd and 98th percentiles of each survey round and country. The underlying question asks: “How much higher/lower do you think prices, in general, will be (12 months from now / 3 years ahead) in the country you live in?” Respondents are asked to provide numerical answers. The right-hand panel shows an unweighted binned scatterplot of average revisions to medium-term inflation expectations for respondents who have revised their assessment of the current inflation rate.

The cross-sectional patterns of revisions in medium-term inflation expectations suggest a relationship between trust in the ECB and the extent of revisions. Specifically, the data show that respondents with a higher level of trust in the ECB are more likely to revise their medium-term inflation expectations in line with news about current inflation. This suggests that the ECB’s ability to communicate its policy stance and commitment to maintaining price stability is important in anchoring medium-term inflation expectations.

Changes in Expectations of Agents Who Set Prices and Wages

The analysis also explores changes in the expectations of survey respondents who indicate that they play an active role in wage and price-setting via their employment or business activities. The data suggest that such agents have become more pessimistic about future inflation throughout 2022. This could be due to a combination of factors, including the increase in uncertainty about the future path of inflation, the weakening of global demand, and the increasing cost of inputs. It is also possible that agents are considering that the ECB has recently lowered its inflation target from 2.5% to 2.0%.

Related Facts

The ECB’s Consumer Expectations Survey (CES) is a quarterly survey of households in the euro area. It provides information on consumers’ expectations regarding future inflation, unemployment, and other economic variables. The survey is conducted in all 19 euro area countries and covers over 5,000 households. The survey is used to inform the ECB’s monetary policy decisions.

Key Takeaways

• The ECB’s Consumer Expectations Survey (CES) provides information on consumers’ expectations regarding future inflation, unemployment, and other economic variables.
• The data suggest that throughout 2022, medium-term inflation expectations became less well-anchored around the ECB’s 2% inflation target.
• The cross-sectional revisions patterns in medium-term inflation expectations suggest a relationship between trust in the ECB and the extent of revisions.
• The data suggest that agents who play an active role in wage and price-setting have become more pessimistic about future inflation for 2022.

Conclusion

The ECB’s Consumer Expectations Survey data suggest that medium-term inflation expectations have become less well anchored around the ECB’s 2% inflation target throughout 2022. The cross-sectional revisions patterns in medium-term inflation expectations suggest a relationship between trust in the ECB and the extent of revisions. Agents actively participating in wage and price-setting have become more pessimistic about future inflation throughout 2022. By taking the necessary monetary policy actions and actively communicating how monetary policy contributes to stabilizing future inflation, the ECB can help strengthen public trust and prevent recent price and cost shocks from having longer-lasting effects on inflation expectations.