Consumers’ perception of inflation in inflationary and deflationary environment

The paper employs survey data on quantitative inflation perceptions to investigate the formation of consumers’ opinions about current price developments. Firstly, we compare Polish consumers’ estimates of price changes with the consumer price index (CPI) and find that consumers react more quickly to inflation increases than decreases, and that they ignore small moves in inflation. Moreover, the previously stable relation between inflation perception and the CPI inflation was distorted during the deflationary period, leading to a smaller perception bias. Secondly, we relax the assumption that consumers perceive price changes in the CPI terms and show that prices of food and prices related to housing, water, gas, electricity, etc. have similar impact on inflation perception as on the CPI infla tion, contrary to clothing and footwear prices which weight is overestimated and to transport prices which weight is underestimated. Thirdly, selective attention of consumers to price changes and asymmetric reaction to increases and falls in prices, captured by alternative price aggregates, do not explain inflation perception during deflation.