Household consumption expenditures and the consumer confidence index

Household consumption constitutes two thirds of GDP in Hungary. Accordingly, in addition to influencing expected economic growth, consumption plays a prominent role in shaping pricing behaviour. Consequently, understanding and forecasting the consumption processes as precisely as possible can be of key importance to the operations of the central bank. The consumer confidence index, which has the earliest release date of all indicators measuring the consumption behaviour of households, may help achieve this goal. In this article, I examine what the confidence index measures, what makes it closely related to developments in consumption, and to what extent it can be used in forecasting those developments. It is found that the confidence index is reasonably good at explaining variables such as household income, the economic situation of the country, unemployment and developments in inflation, but that it tends to track these variables, rather than forecast them. However, questions related to these variables are incapable of fully grasping consumption decisions. Use of composite indicators derived from the questions with the best explanatory power may contribute to the explanation of certain subindicators, but even this fails to significantly improve the precision of short-term forecasts. In addition to the current economic situation, the index also reflects the effect of political cycles.