Deflation expectations

BIS Working Papers  |  No 699  | 
07 February 2018



We study how inflation expectations behave during periods of deflation. We analyse, in particular, whether inflation expectations become less well anchored. If expectations are less well anchored, they tend to be less stable and forecasters disagree to a greater extent about future inflation.


After the Great Financial Crisis of 2008-09, the widespread shift to low inflation brought policymakers' concerns about deflation back to the fore. One reason is the effect of deflation on inflation expectations. Indeed, the downward drift in expectations was one reason for the introduction of unconventional monetary policy. However, research on expectations during deflations is scant. Moreover, views differ about the implications of deflations for the economy. Our contribution rests on a systematic analysis of professional forecasters' expectations. The study covers 43 advanced and emerging market economies (EMEs). In our global data set, most deflations occur in EMEs.


We find evidence that inflation expectations are less well anchored during deflations. Inflation expectations tend to fall and depend more on past inflation. Forecasters also disagree more about future inflation when prices are falling. These shifts also cause greater disagreement about future output growth.



We analyse the behaviour of inflation expectations during periods of deflation, using a large cross-country data set of individual professional forecasters' expectations. We find some evidence that expectations become less well anchored during deflations. Deflations are associated with a downward shift in inflation expectations and a somewhat higher backward-lookingness of those expectations. We also find that deflations are correlated with greater forecast disagreement. Delving deeper into such disagreement, we find that deflations are associated with movements in the lefthand tail of the distribution. Econometric evidence indicates that such shifts may have consequences for real activity.

JEL classification: E31, E58

Keywords: deflation; inflation expectations; forecast disagreement; monetary policy