Making sense of consumers’ inflation perceptions and expectations – the role of (un)certainty

Aidan Meyler and Lovisa Reiche

Economic Bulletin Articles, 2021, vol. 2

Abstract: Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand their nature and how they are formed. This article shows that inflation (un)certainty is a channel that can shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. It helps explain why these may be higher than actual inflation. This is because, in a situation of uncertainty, many consumers report in rounded numbers, often leading them to quantitatively overestimate inflation. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with sociodemographic characteristics and economic sentiment. Furthermore, the uncertainty channel may also explain the negative correlation observed between the economic outlook and inflation expectations. JEL Classification: D11, D12, D84, E31, E52

Keywords: Consumers; Expectations; Inflation; Uncertainty (search for similar items in EconPapers)
Date: 2021-03
Note: 496790
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbart:2021:0002:2

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