Inflation Expectations of Euro Area Consumers and Firms

Conor Parle and Zivile Zekaite

No 14/EL/20, Economic Letters from Central Bank of Ireland

Abstract: This Economic Letter examines what information is most relevant for the inflation expectations of consumers and firms in the euro area. We find that confidence in the economy is very important. However, the relationship between confidence and inflation expectations for consumers is negative, while it is positive for firms. Actual consumer price inflation, especially for food and energy, is also strongly associated with expectations of future inflation but to a varying degree. Producer price inflation is an important predictor of firms’ expectations. In addition, employment expectations are relevant for firms and past economic situation plays a large role for consumers. Our results shed some light as to why euro area consumers’ and firms’ inflation expectations diverged at the start of the COVID-19 crisis.

Date: 2020-12
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