Communication, information and inflation expectations

This article examines the relationship between consumer expectations and inflation forecasts by the central bank. We assume that the inflation forecast is one of the factors influencing expectations. The vector error correction model is employed to test our hypothesis. The research covers the Bank of England, the Bank of Sweden, and the Czech National Bank from 2001–2015. Our results confirm the interrelation of inflation forecasts and expectations. The research contributes to the literature on inflation expectations and on inflation forecast targeting.

INTRODUCTION The continuous growth of the price level in Iran indicates the prices trend is rising. Short-term inflation dynamics and cyclical interaction with actual economic variables are central in macroeconomics, especially monetary policy analysis. METHODOLOGY Given the importance of inflation expectations, this study examines how it is formed by considering comparative and rational inflation expectations. Since the relationship between inflation expectations and consumption has an actual application in determining economic policies, this relationship is examined during the period 1367: 1 to 1395: 4 by considering the logarithm of consumption, logarithm of income, and logarithm of inflation as the research variables. All data sets used in this study are first-order, meaning that they only need to be differentiated once to be stationary. Because among the various consumption models, Friedman has played an essential role in introducing expectations into consumption theory and has talked about hot money. His approach has been used in the model. To model invisible variables such as rational inflation expectations, space-state models that allow unobservable variables to be used both in estimating the model and estimating them in the models are used. In this regard, the Kalman-filter algorithm was used, a powerful recursive method for optimal predictions of invisible variables and efficient estimates of the parameters of space-state models based on mathematical hope. The partial adjustment method has been used to model adaptive inflation expectations. For consistent estimation, methods that consider the endogeneity of variables should be used. Also, because the variables of collaborative research are of the same order, if there is no co-integration relationship between them, their differential form should be used. According to Granger's theorem, there will be an error correction if there is a co-integration relationship between the variables. Proving the endogeneity of associations related to expectations in the economic framework and therefore due to the existence, we estimate the error correction model with the GMM method. FINDINGSThe results show that the effect of rational inflation expectations on long-run consumption in the Iranian economy is positive and significant. Thus, with a one percent increase in expected inflation, consumption will increase about 6 percent, but there is no significant relationship between rational expectations and consumption in the short term. The effect of comparative inflation expectations on consumption is also positive and significant. Thus, a one percent increase in comparative expected inflation will lead to an increase in consumption of 2 percent. Because in the case of comparative expected inflation, a positive relationship between expected inflation and consumption is confirmed, so that the elasticity of consumption to expected inflation is 2%. In other words, a 1% increase in comparative expected inflation will lead to a 2% increase in consumption. CONCLUSION In the practical aspect of this research, it can be said that since Iran's economy is in a state of stagflation, (1) Managing inflation expectations through an efficient communication framework with economic factors can transform the retrospective pricing system into a futuristic one and reduce the actual costs of deflation. (2) The policymaker should take measures so that the inflation expectations of the society are not intensified because this issue can stimulate inflation by intensifying consumption and increasing its total demand. Then inflation expectations spread in this direction which has happened regularly in recent years. (3) Also, due to the impact of consumption changes on aggregate demand and aggregate demand on corporate investment decisions, the attention of monetary policymakers and the central bank on controlling inflation expectations is needed more than ever due to its direct impact on consumption. In this regard, policymakers should be careful in implementing their policies not to exacerbate inflation expectations. For example, what policies to enforce (or not) and what policies to implement (or not) play a role in forming positive or negative policies destructive inflation expectations. However, in this regard, expert economic advisors should be consulted on any policy. 4- Also, anti-inflation policies that control inflation have a favorable effect on inflation expectations and are therefore recommended.

Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we are able to show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.

Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we can show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.

Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we are able to show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.

Inflation expectations play an important role in the transmission mechanism of inflation targeting in the context of the length and costs of the disinflationary process. The objective of our paper is to employ econometric analysis to verify whether financial analysts’ and corporate managers’ inflation expectations in Czechia (from Q3 1999 to Q2 2024) show basic features of rational expectations and what impact the past YoY CPI inflation rate, the CNB’s inflation forecast and the CNB’s inflation target have on their expectations. We find that the formation of financial analysts’ and corporate managers’ yearly inflation expectations with time horizons of one year and three years differs considerably. For corporate managers’ inflation expectations, adaptive reasoning plays a more important role. Financial analysts take more account of the CNB’s one-year inflation forecasts in forming their yearly expectations, while the inflation target, as an explanatory variable, is statistically significant only for their three-year inflation expectations. Neither group of respondents meets the required criteria for rational expectations in terms of the tests formulated by Pesaran (1987), and Fama (1965 and 1970). In particular, their yearly inflation expectations exhibit systematic errors. Surprisingly, the time series of financial analysts’ inflation expectations contain a seasonal component.

Purpose This paper aims to analyze how economic policy uncertainty (EPU) affects inflation expectations. The study uses unit-level observations of 3 months ahead and 1-year ahead inflation expectations from the Reserve Bank of India’s Inflation Expectations Household Survey (IESH) to explore the variations in consumer confidence across several cities in India. Design/methodology/approach This paper uses unit-level observations of 3 months ahead and 1 year-ahead inflation expectations of the households from the Reserve Bank of India’s IEHS between September 2008 to July 2024. It uses a fixed effects regression exercise to examine the impact of EPU on the households’ inflation expectations. Findings The study results show that EPU negatively and significantly impacts consumers’ short-term inflation expectations. Heterogenous analysis concerning gender reveals that impact of EPU on inflation expectations is higher for women than men. Further, respondents in the working-age population and greater income uncertainty are more sensitive to changes in EPU on inflation expectations. A disaggregated analysis is also conducted to analyze the impact of EPU on several disaggregated indicators of inflation expectations, showing that EPU has a larger impact on durables and house prices compared to nondurables and services. Robustness tests with alternative policy uncertainty measures and placebo tests corroborate our findings. Practical implications These findings indicate that EPU can potentially depress the household’s own price expectations related to several components of their consumption basket due to precautionary saving behavior, consequently leading to a pessimistic view of overall prices. Originality/value To the best of our knowledge, no study has explored the impact of inflation policy uncertainty on inflation expectations using unit-level survey data for an emerging economy like India. Furthermore, survey-level data allows us to examine the heterogenous impact of EPU based on household characteristics. Moreover, it also establishes the household’s own consumption basket channel through which EPU impacts the overall inflation expectations.

This chapter explores whether the 6 per cent inflation rate matters for the transmission of shocks to inflation expectations. In addition, do inflation expectations update in response to shocks? Evidence establishes that the one-year-ahead and two-years-ahead inflation expectations increase in response to a positive shock to current inflation expectations. Existing inflation amplifies the one-year-ahead and two-years-ahead inflation expectations response to positive current inflation expectations shocks. This suggests that inflation expectations update following a positive shock to current inflation expectations and the degree to which they update is amplified by prevailing inflation. The results indicate that price stability matters. In addition, inflation relative to 6 per cent matters for the response of inflation expectations to shocks. Evidence shows that inflation above 6 per cent amplifies the response of the two-years-ahead inflation expectations more than when it is below 6 per cent. This means that price stability can help lower and anchor inflation expectations via its direct effects and as the amplifier of shocks. Overall, evidence in this chapter indicates that inflation expectations respond to shocks and their rate of updating is amplified when inflation exceeds 6 per cent. This means that the enforcement of price stability plays a role in minimizing the propagation of inflationary shocks.

This paper investigates the characteristics of households’ inflation expectations using the micro‐data of the Opinion Survey on the General Public’s Views and Behavior conducted by the Bank of Japan. The results of the Kahn test indicate the existence of strong downward rigidity in households’ price expectations. One consequence of this downward rigidity is that survey answers strongly react to shocks to inflation expectations in a high inflation environment, but only weakly in a low inflation environment. Furthermore, this downward rigidity may hide potential links between inflation expectations and other economic indicators and may produce spurious correlations between them. To overcome these problems, this paper adjusts the distribution of survey answers on inflation expectations for downward rigidity. Using this adjusted distribution, the paper examines the relationships between households’ inflation expectations and their views on various economic issues. The main results are as follows. From the end of 2005 onward, a negative correlation between households’ inflation expectations and their outlook for economic conditions can be observed. Regarding the activities of the Bank of Japan, the following relationships can be observed from 2006. First, the more strongly households are interested in the Bank’s activities, the more stable are their inflation expectations. And second, the more confidence households have in the Bank, the more tightly are their inflation expectations anchored.

PurposeThe Inflation Expectations Survey of Households, conducted by the Reserve Bank of India (RBI), indicates that there is considerable disparity in inflation expectations across cities in India. The purpose of this paper is to investigate why different cities exhibit heterogeneous inflation expectations despite coming under a central monetary policy umbrella.Design/methodology/approachFirst, the correspondence between city-level inflation expectations and city-specific economic characteristics is mapped. Second, how the disagreement in inflation expectations across cities, measured by dispersion, behaves over the business cycle is investigated. Finally, using seemingly unrelated regression technique, the economic factors that play a role in explaining inflation expectations heterogeneity across cities are estimated.FindingsCities with higher economic activity and cost of living have higher inflation expectations. Disagreement across cities regarding inflation expectations rise with an increase in output gap and inflation. Information friction plays an important role in explaining the disparity in inflation expectations across cities, and the effects of macro-level factors vary across cities, thereby accentuating expectations dispersion.Research limitations/implicationsMonetary policy-related communication by the RBI (toward the general public) should increase in order to address information friction, which, in turn, would temper down the extent of inflation expectations heterogeneity across cities in India.Originality/valueThis is a novel application of the data from the monetary policy perspective. Heterogeneity in inflation expectations across cities or regions is an unexplored area. The use of nightlights as a proxy for city-level economic activity in India (in absence of data on city-level income) is another original contribution.

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

Purpose The study intends to evaluate the impact of inflation expectation on the performance of listed commercial banks in India during 2005–2021. Inflation expectation is considered as a direct policy tool by the policymakers for stability of the economy. The study explores how inflation expectation affects the performance indicators of the Indian banking industry while controlling for a wide range of bank-specific factors. Design/methodology/approach The study applies the generalized method of moments (GMM) on a panel sample of 27 listed bank to analyse the impact of inflation expectation on banking sector performance. The data on inflation expectation are obtained from the household inflation expectation survey introduced in India by the Reserve Bank of India in 2005. Return on assets (ROA), return on equity (ROE) and Tobin's Q have been considered as the banking performance indicators in this study. Findings Empirical results exhibit that inflation expectation is instrumental in deciding the banking sector's performance. Inflation expectation has been found to have a significant and positive impact on accounting-based measures of banking performance. At the same time, it shows negative impact on the marketing-based measure. Practical implications The study gives a clear picture about how inflation expectation affects the banking performance and the monetary policy of the country. The study provides crucial insights to develop strategic decisions for the Indian banking sector. The adoption of proper macroeconomic policies, taking into account inflation expectation levels, is instrumental in enhancing bank's performance and in achieving economic growth. Originality/value This study contributes to the growing body of literature on the impact of inflationary conditions on banking performance. The originality lies in capturing the role of inflation expectation solely in determining banking sector performance.

The forward-looking policy is useful for joint decision-making between public and monetary authorities. The study calculates the monetary policy transparency index, inflation expectations, and their volatility spillover effects at a data-driven angle. Optimization mechanisms of monetary policy transparency influencing inflation and inflation expectations volatility, and transparency index based on market participants’ optimization decisions are analysed. Multivariate stochastic volatility models for measuring the volatility of inflation and inflation expectations are analysed. Additionally, the relationships between inflation and inflation expectations volatility and transparency are tested empirically. Tests show that: first, the most suitable models for measuring volatility of inflation and inflation expectations are obtained. Second, monetary policy transparency has a negative effect on the volatility of inflation and inflation expectations. Third, there is a unidirectional Granger relationship from the volatility of inflation expectations to the volatility of inflation, and it indicates that the volatility of inflation expectations has an important guiding effect on that of inflation, and it is necessary to stabilize inflation expectations for stabilizing inflation. Fourth, improving monetary policy transparency can not only reduce inflation, inflation expectations, inflation volatility, inflation expectations volatility, but also reduce the sacrifice rate, that is, to stabilize the price level with less anti-inflation costs.

This paper (1) examines the properties of survey based households’ inflation expectations and investigates their forecasting performance. With application of the individual data from the State of the Households’ Survey (50 quarters between 1997Q4 and 2010Q1) it was shown that inflation expectations were affected by the consumer sentiment. Multi-Group Confirmatory Factor Analysis (MGCFA) was employed to verify whether a set of proxies provides a reliable basis for measurement of two latent phenomena – consumer sentiment and inflation expectations. Following the steps proposed by Davidov (2008) and Steenkamp and Baumgartner (1998), it appeared that it was possible to specify and estimate a MGCFA model with partial measurement invariance. Thus it was possible to eliminate the influence of consumer sentiment on inflation expectations and at the same time to obtain individually corrected answers concerning the inflation expectations. Additionally, it was shown that the linear relation between consumer sentiment and inflation expectations was stable over time. As a by-product of analysis, it was possible to show that respondents during the financial crisis were much less consistent in their answers to the questions of the consumer questionnaire. In the next step of the analysis, data on inflation expectations were applied to modelling and forecasting inflation. It was shown that with respect to standard ARIMA processes, inclusion of the information on the inflation expectations significantly improved the in-sample and out-of-sample forecasting performance of the time-series models. Especially out-of-sample performance was significantly better as the average absolute error in forecasts of headline and core inflation was reduced by half. It was also shown that models with inflation expectations based on the CFA method (after elimination of the consumer sentiment factor) provided better in-sample forecasts of inflation. Nevertheless, it was not confirmed for the out-of-sample forecasts. (1) Project financed by the National Bank of Poland. Polish title of the project: Prognozowanie inflacji na podstawie danych koniunktury gospodarstw domowych. Zastosowanie konfirmacyjnej analizy czynnikowej dla wielu grup do oczyszczenia prognoz inflacji z czynnika ogolnego nastroju gospodarczego.

I examine whether commodity prices have been a contributor to the inflation volatility experienced by the Chilean economy in recent years. First, I show that of all commodities, oil is the most significantly correlated with future inflation and inflationary expectations. Next, I use a Gaussian affine term structure model with observable macroeconomic factors to quantitatively study how shocks to oil prices affect bond yields and inflation expectations. I find a statistically significant but economically modest effect. An increase in the price of oil of 20% raises one-year inflation expectations by 25 basis points, while five-year expectations increase only by 8 basis points. The results suggest that central banks could benefit from paying attention to commodity prices when setting monetary policy.