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Inflation uncertainty and inflation expectations: Micro-level evidence from the eurozone

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  • Drakos, Konstantinos
  • Konstantinou, Panagiotis Th.
  • Thoma, Foteini-Anna

Abstract

This paper investigates the evolution of consumers’ inflation expectation. Using Eurobarometer survey data, we estimate models of the probability and the size of “forecast failure” of inflation forecasts. We document that higher inflation uncertainty, higher lagged inflation rates and increased inflation news volume reduce both the probability of failing to predict the correct inflation trajectory and the probability of making large forecast errors – in line with models featuring rational forecasting and sticky information. Furthermore, when the volatility of shocks to inflation increases, individuals tend to make incorrect inflation forecasts as well as large forecast ‘mistakes’, consistent with models featuring asymmetric loss functions. We also document heterogeneity in expectation formation related to demographic characteristics of respondents such as age, gender or education.

Suggested Citation

  • Drakos, Konstantinos & Konstantinou, Panagiotis Th. & Thoma, Foteini-Anna, 2020. "Inflation uncertainty and inflation expectations: Micro-level evidence from the eurozone," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    • Handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300891
    DOI: 10.1016/j.jeca.2019.e00150
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    Cited by:

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    2. Carlos Medel, 2021. "Searching for the Best Inflation Forecasters within a Consumer Perceptions Survey: Microdata Evidence from Chile," Working Papers Central Bank of Chile 899, Central Bank of Chile.
    3. Piotr Nowaczyk & Joanna Hernik, 2020. "Adopting the Euro will Cause an Increase in Prices: A Study on Inflationary Processes in Euro Area Member States," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 377-403.

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