The anchoring of long-term inflation expectations of consumers: insights from a new survey

Summary

Focus

With euro area inflation and professionals' long-term euro area inflation expectations persistently below the European Central Bank's inflation aim, a key question for the ECB is whether long-term inflation expectations have de-anchored. To date, most of the empirical work has relied on measures of expectations of professionals, while little is known about the expectations of firms and of households. 

Contribution

We investigate whether consumers' long-term expectations of euro area inflation are well anchored to the ECB's inflation aim. We use data from a new survey of Dutch consumers' long-term expectations of inflation in the euro area and the Netherlands. The survey is a new satellite survey of the Household Survey of De Nederlandsche Bank. 

Findings

We find that long-term euro area inflation expectations held by Dutch households are not well anchored to the ECB's inflation aim. Importantly, unlike market participants and professional forecasters, Dutch households appear to be concerned about higher, not lower, euro area inflation in the long run.

Abstract

We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible deanchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.

JEL classification: E31, E58, F62.
Keywords: inflation expectations.