Inflation expectations anchoring: new insights from micro evidence of a survey at high-frequency and of distributions

Focus

Over the past decade, monetary authorities have been confronted by important challenges: persistent deviations of inflation from target in spite of massive monetary easing and several years of robust growth; great uncertainty about the dynamics and drivers of the inflation process; and the important role of factors outside the direct control of central banks. These challenges may pose risks for monetary authorities' credibility, thereby undermining the effectiveness of monetary policy. To understand if this is indeed the case requires assessing whether long-term inflation expectations have remained anchored to the central bank's inflation target.

Contribution

We shed new light on the anchoring of long-term euro area inflation expectations since the crisis by using micro evidence from a new survey at high (weekly) frequency. We supplement this information with measures based on the whole distribution of inflation expectations from a quarterly survey. We perform a number of statistical tests, which are typically performed on inflation expectations measures extracted from financial instruments, such as inflation swaps.

Findings

In contrast to recent evidence from market-based measures of inflation expectations, we find that long-term inflation expectations remained well anchored to the ECB's inflation aim, which has acted as a focal point. We find only subtle signs of long-term inflation expectations not being perfectly well-anchored.

Abstract

We shed new light on the anchoring of long-term euro area inflation expectations since the crisis by using micro evidence from a new survey at high (weekly) frequency. We find that long-term inflation expectations remained well anchored to the ECB's inflation aim, which has acted as a focal point. By contrast, we find no evidence that professional forecasts (reported by Consensus Economics) acted as focal points. But there are subtle signs of long-term inflation expectations not being perfectly well-anchored. Using measures based on the distribution of inflation expectations from a quarterly survey, namely uncertainty based on the full distribution, the probability of expected long-term inflation lying between 1.5% and 2.5%, and the effect of short-term on long-term deflation risk, we find that long-term euro area inflation expectations have remained well-anchored, and have become better-anchored between 2011 and 2018.

JEL codes: E31, E58, F62

Keywords: inflation expectations