Inflation expectations (expectations on inflation rate)

Current perceptions about the level of future depreciation in the value of money. – These can be measured in part by the price of index-based bonds compared with nominal interest rate bonds. In England, inflation expectations are the most important measure of monetary policy. Because monetary policy measures affect prices only after a certain time lag, a central bank must in principle also base its monetary policy decisions on expected future price developments. – The degree of inflation expectations depends on the credibility of the central bank’s longer-term price-stabilizing policy. If this confidence is high, there is also a general understanding that real income losses due to oil prices, for example, are to be accepted; the feared second-round effects are then avoided. On the other hand, it has been shown that – existing unfavorable inflation expectations easily become entrenched, and – their recovery is very protracted and – possible only at considerable macroeconomic cost. – The ECB has made an important contribution to the entrenchment of inflation expectations in the euro area by announcing an inflation target – at two percent over the medium term – , by its regular commitment to stick to this reference value, and by its open-mouth policy. – See agricultural policy, banknote value restriction, code words, consensus economics, dividend, inflation-linked, third pillar, purchasing managers survey, survey of professional forecasters, monetary policy, forward-looking, credibility paradox, Greenspan doctrine, Goldilocks economics, greenspeak, inflation, perceived, inflation targeting, inflation compensation, inflation expectations, constancy criterion, lie-and-deceive thesis, milk price, Mundell-Tobin effect, food, price adjustments, real interest rate argument, swap, inflation-indexed, government debt-interest rate relationship, Theil disequilibrium coefficient, fuzziness, constructive, foreshadow effects, commodity hoards, time preference, interest rate expectations, two-pillar policy, second-round effects. – Cf. ECB Monthly Bulletin of February 2002, pp. 18 ff; ECB Monthly Bulletin of May 2002, pp. 28 ff; ECB Monthly Bulletin of August 2003, pp. 26 ff; ECB Monthly Bulletin of September 2003, pp. 34 ff, Annual Report 2003 of the Deutsche Bundesbank, p. 41, Monthly Report of the ECB of May 2004, p. 34 ff, Monthly Report of the ECB of August 2004, p. 39 ff, Monthly Report of the ECB of November 2004, p. 39 ff, Monthly Report of the ECB of May 2005, p. 41 ff, ECB Monthly Report of July 2005, pp. 72 f. (reasons for different perceptions), ECB Monthly Report of February 2006, pp. 44 ff. (p. 46: break-even inflation rate: yield difference between nominal and indexed bonds), ECB Monthly Report of May 2006, pp. 44 ff. (there also analysis of indicators of longer-term inflation expectations), ECB Monthly Report of July 2006, pp. 63 ff. (textbook presentation; many overviews), ECB Monthly Bulletin of September 2006, pp. 56 ff. (p. 57: inflation expectations and actual inflation since 1992), Deutsche Bundesbank Monthly Bulletin of October 2006, pp. 15 ff. (detailed presentation with references in the notes), ECB Annual Report 2006, pp. 57 ff. (detailed presentation; overviews), ECB Monthly Bulletin of September 2007, pp. 40 ff. (seasonal pattern of break-even inflation rate; comparison with inflation-indexed swap rates), ECB Monthly Bulletin of November 2007, pp. 41 ff. (causes and (p. 44) effects of increased inflation expectations; overviews), Deutsche Bundesbank Monthly Bulletin of November 2007, pp. 56 f. (measured relationship between perceived and expected inflation rates; overviews), ECB Monthly Bulletin of December 2007, pp. 71 ff. (development since 2001; information content of corresponding measures), Monthly Report of the Deutsche Bundesbank of July 2008, p. 43 (role of expectations and central bank credibility), Monthly Report of the ECB of November 2008 (rise in yields on inflation-linked bonds also due to expectations of strong government spending in connection with the financial crisis; other reasons), Monthly Report of the Deutsche Bundesbank of December 2008, pp. 38 f. (longer-term (at medium and long term) inflation expectations are decisive for market participants’ planning), ECB Monthly Bulletin of March 2010, pp. 61 ff. (comparisons 2003-2009; overviews; references), p. 95 (fiscal imbalances increase inflation expectations), ECB Monthly Bulletin of February 2011, pp. 79 ff. (essay with detailed explanations and many overviews as well as references), ECB Annual Report 2012, pp. 42 ff. (inflation expectations since 2004; p. 45: uncertainties identified in surveys persist at high levels), ECB Monthly Bulletin of October 2013, p. 44 ff. (anchoring long-term inflation expectations; reviews), Deutsche Bundesbank Monthly Bulletin of April 2014, p. 73 ff. (meaning and measurement of the expected inflation rate; reviews; references), ECB Monthly Bulletin of July 2014, p. 38 f. (Inflation premia as a measure of inflation expectations; reviews); pp. 49 ff. (Inflation expectations from different sources compared; reviews).

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