The anchoring of long-term inflation expectations of consumers: insights from a new survey

We provide new evidence on the level and probability distribution of consumers longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECBs inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECBs inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECBs inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECBs inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible de-anchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income. 

Keywords: Inflation expectations
JEL codes E31; E58; F62

Working paper no. 688