Do Consumers in Europe Anticipate Future Inflation?

Abstract

In this paper we analyze whether consumers in European economies are able to anticipate future inflation. For this purpose we check expectational errors and estimate the degrees of forward-lookingness and macroeconomic efficiency of consumer inflation expectations. We also test the impact of the recent financial crisis on the formation of these expectations. Our results suggest that capacities of consumers to anticipate future inflation are rather constrained, although their opinions contain some forward-looking elements. Consumers seem to anticipate future inflation to the highest extent in France, Cyprus, the European Monetary Union as a whole, and the Netherlands. There is also a relatively high degree of anticipation in Austria, Belgium, Estonia, Hungary, Italy, Latvia, Poland, and Slovakia. Consumer inflation expectations in advanced economies display better forecasting properties and higher degrees of forward-lookingness and efficiency than expectations in transition economies. Finally, our results suggest that the global financial crisis has influenced the formation of inflation expectations in both groups of economies.