Anchored Inflation Expectations: What Recent Data Reveal

Olena Kostyshyna, Isabelle Salle and Hung Truong

Staff Working Papers from Bank of Canada

Abstract: We analyze micro-level data from the Canadian Survey of Consumer Expectations through the lens of a heterogeneous-expectations model to study the state-dependent risk of inflation expectations unanchoring in low- and high-inflation environments. In our model, agents are either trend-chasing or mean-reverting forecasters of inflation. We interpret the degree of mean reversion in inflation expectations as a measure of anchoring, which varies over time with the share of agents using each approach. We find that during the post-pandemic inflation spike, trend-chasing expectations surged, resulting in a heightened risk of unanchoring expectations and entrenching above-target inflation. Furthermore, forming trend-chasing inflation expectations is associated with higher expectations for other key economic variables — such as interest rates, wages, and house prices — and a restraint in household spending. We provide additional new insights into household expectation formation, documenting that forecasting behaviors, attention, and noise in beliefs vary across socio-demographic groups and correlate with views about monetary policy.

Keywords: Inflation; and; prices (search for similar items in EconPapers)
JEL-codes: D84 E31 E70 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2025-01
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:25-5

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