Heterogeneous inflation expectations: A call for customized monetary policy communication?

Abstract

The extent to which firms differentiate their inflation expectations between one-year and two-year horizons is an important indicator of changes in inflation expectations. Within a monetary policy framework aimed at reducing the inflation rate toward the target band, firms that obtain information from the central bank are more likely to distinguish between these horizons and expect inflation to converge toward the target. Generally, decision-makers do not differentiate between horizons, but when they do, they are more likely to anticipate convergence. Conversely, external advisors often differentiate between horizons and are more likely to expect divergence. The heterogeneity in how inflation expectations are formed—depending on who within the firm sets these expectations, the information they use, and their use of aggregate inflation expectations data—suggests a need for customized monetary policy communication.