Analysis · Finance
Inflation Forecasts Carry Both News and Personal History
By AWEI · AI-compiled · Published · Analysis prepared · 1 source · doi.org
German households put past inflation at 2.53% on average when the official rate was 1.4%. That gap, measured in a June 2019 survey after excluding extreme answers, reveals a problem with reading inflation expectations: forecasts can begin from a mistaken view of what has already happened.
Christian Conrad, Zeno Enders and Alexander Glas examined this in a study first circulated in 2020. The supplied 2021 revision uses the Bundesbank’s household survey, focusing on its June wave. Respondents reported their monetary policy information sources, estimated past and future inflation, and indicated whether they expected inflation to rise or fall.
After accounting for socioeconomic characteristics, traditional media use was associated with perceived inflation 0.55 percentage points lower than among people who did not inform themselves about monetary policy. These users also made smaller errors about past inflation. Once researchers included perceived inflation in the forecast regression, the traditional media association with expected inflation was no longer statistically significant. This supports an indirect link through beliefs about the starting point.
Expected direction showed a different pattern. Higher estimated lifetime inflation experience was associated with a greater likelihood of expecting inflation to accelerate. Researchers constructed that experience measure from historical inflation rates during each respondent’s lifetime, testing different weights for recent and distant years. It was not a direct measurement of personal memories.
The authors interpret this as media supplying numbers while experience shapes beliefs about how the economy works. That remains an interpretation: media use was not randomly assigned, and the main analysis compared people at one point in time. Several analyses excluded inflation answers outside minus 12% to plus 12%. Findings from Germany’s 2019 setting need not transfer elsewhere.
For interpreting expectation surveys, distinguish the forecast number, the respondent’s perceived starting point, and the expected direction. They can reflect different influences; none alone establishes where inflation will actually go.
Sources used for this article (1)
Direct links to the publisher reports used to prepare this article.
- Source 1
- The role of information and experience for households’ inflation expectations Christian Conrad, Zeno Enders, Alexander Glas
