November 16, 2023: Richhild Moessner (BIS Basel)
Reactions of household inflation expectations to a symmetric inflation target and high inflation
We provide evidence on the reactions of the level and probability distribution of households’ expectations of inflation in the euro area to the ECB’s monetary strategy change to a symmetric inflation target in July 2021, and to the subsequent strong rise in euro area inflation above target. We use a randomised control trial within a monthly representative Dutch household survey of short- and long-term euro area inflation expectations, where half of respondents receive information about the ECB’s inflation target and actual inflation. The survey responses give rise to three main findings. First, we find that the introduction of a symmetric inflation target by the ECB did not have a significant immediate upward effect on the level of either long-term or short-term euro area inflation expectations of consumers, both for the group with information treatment and for the control group. Second, and by contrast, euro area long-term and short-term inflation expectations increased significantly in the period when inflation increased strongly above target. Taken together, the results document that the ECB strategy revision itself did not have a material impact on household inflation expectations, but the high realisations of actual inflation did. These findings suggest that when it comes to household inflation expectations and central bank credibility, inflation outcomes speak louder than words. The third finding is that households’ expected probabilities of high euro area inflation (4% or higher) also increased significantly in response to high above-target inflation at both the long- and short-term horizons, and both for the group with information treatment and for the control group. These results suggest that long-term euro area inflation expectations of households have become less well anchored as inflation has increased strongly above target.