Can information on inflation influence consumers’ inflation expectations?
As inflation rose both in Europe and the U.S., one of the main concerns of central banks is for households’ inflation expectations not to become de-anchored. In this paper, Dräger et al. examine whether and how this can be achieved. In Germany, the Bundesbank Survey on Consumer Expectations showed that the mean short-run inflation expectations by German consumers, rose by about 1 percentage point in the second half of 2021, while long-run inflation expectations increased by about 0.5 percentage points. Can therefore central bank communication influence expectations of the general public?
To answer this question, they develop different information treatments about future inflation development using a randomized control trial (RCT). The RCT was incorporated in the September 2021 Survey on Consumer Expectations in the Bundesbank Online Panel of Households. In particular, they randomly allocate respondents to five different information treatments. The authors then look at a) the reaction of inflation expectations to the information about the current inflation rate (and past inflation from one year ago); and b) whether complementary information about inflation projections can offset the reaction of the short- and long-run inflation expectations to the information about currently observed inflation dynamics. They find:
Our results from the survey experiment demonstrate that targeted communication using explicit numerical inflation projections is able to substantially limit the observed spillover effects from the current inflation surge to inflation expectations. We also find some evidence that text-based communication characterizing the inflation surge either as temporary or more long-lasting is capable of reducing the spillovers from current inflation to long-run inflation expectations, but to a lesser extent compared to an alternative with numerical inflation projections.
How to Limit the Spillover from the 2021 Inflation Surge to Inflation Expectations?
Authors: Lena Dräger, Michael J. Lamla, Damjan Pfajfar
From: Leibniz University, Leuphana University of Luneburg
…but the type of information matters!
In this commentary, Hoffmann et al. also use the Bundesbank Online Panel Households but develop a different a randomized control trial (RCT), according to which respondents were randomly selected into several groups which received different variations of quantitative and qualitative ECB communication about projected inflation in the medium term. A control group did not receive any communication. They find that:
- Individuals who were shown ECB communication on the inflation outlook significantly reduce their inflation expectations. Furthermore, explaining the outlook verbally has a substantially larger effect than merely providing numerical projections.
- The qualitative information has a substantially stronger impact than the quantitative information. While the first lowers expectations by roughly 47 basis points for the current year, 28 basis points for the medium term, and 23 basis points for the longer term, the latter only achieves reductions of roughly 17 basis points, 18 basis points, and 11 basis points, respectively.
Words speak louder than numbers: Central bank communication in times of high inflation
Authors: Mathias Hoffmann, Emanuel Moench, Lora Pavlova, Guido Schultefrankenfeld
From: Deutsche Bundesbank, Goethe University Frankfurt
