Revisiting the inflation perception conundrum

Making Sense of Consumer Inflation Expectations: The Role of Uncertainty

“…Döhring and Mordonu (2007) on the other hand find that house prices have a more significant impact on the formation of inflation expectations. Finally, Abildgren and Kuchler (2021) point out, that they only find a correlation with food prices and argue that other frequently bought items or housing may not be relevant. It has been noted by Arioli et al (2016) that neither of these explanations can fully explain the bias, as overestimation exceeds the FROOP or indices including housing significantly.…”

“…Notwithstanding the key role consumers' inflation expectations play in models of monetary policy transmission, research has identified three noteworthy stylised facts about consumers' inflation expectations which are puzzling under the assumption of rational expectations: First, it has been found that consumers consistently overestimate both perceived and expected inflation. Abildgren and Kuchler (2021) call the former phenomenon the "inflation perception conundrum". Second, it has been observed that there is substantial heterogeneity both across countries and across individuals in terms of the levels of inflation expectations.…”

“…Second, it has been observed that there is substantial heterogeneity both across countries and across individuals in terms of the levels of inflation expectations. Some of this expectations heterogeneity is systematically correlated with some sociodemographic characteristics, in particular age, gender, education and income (Jonung, 1981;Arioli, et al, 2016;Abildgren & Kuchler, 2021;Bryan & Venkatu, 2001;Ehrmann, Pfajfar, & Santoro, 2017). Third, recent research shows that a negative economic sentiment is correlated with high inflation expectations (Kamdar, 2019;Candia, Coibion, & Gorodnichenko, 2020;Andre, Pizzinelli, Roth, & Wohlfart, 2019;Binder, 2020).…”

“…It has been noted by Arioli et al (2016) that neither of these explanations can fully explain the bias, as overestimation exceeds the FROOP or indices including housing significantly. To explain further contributions to the overestimation of inflation authors have additionally suggested seasonality (Abildgren & Kuchler, 2021) and behavioural considerations such as loss aversion (Huber, 2011;Stanislawska, 2019) based on Kahneman and Tversky (2013). These behavioural patterns may be amplified by the use of the wording "price changes" as compared to "inflation" as the latter is seen as a general concept that people may be aware of from the news, hence it is relatively anchored to the real inflation rate.…”

Medium- vs. Short-Term Consumer Inflation Expectations: Evidence from a New Euro Area Survey

“…by Arioli et al (2017), European Commission (2014, Stanis lawska (2019) and Stanis lawska et al (2019). Other recently examined aspects include, for example, formation of inflation perceptions and expectations as well as the role of inflation expectations in consumers' economic decisions (Abildgren and Kuchler, 2021;Andrade et al, 2020;Duca-Radu et al, 2020;Easaw et al, 2013).…”