On inflation in the euro area

How anchored are inflation expectations in the euro area?

In this paper, Stanisławska and Paloviita analyze micro-level responses from the new monthly ECB Consumer Expectations Survey (CES) to understand how consumers’ longer-term inflation expectations respond to changing economic conditions and what factors contribute to their responsiveness. The ECB CES survey was launched in its pilot phase in January 2020 and covers the six largest euro area economies (Belgium, France, Germany, Italy, the Netherlands, and Spain) which account for the major share of the euro area in terms of HICP weights (86%). The authors analyzed 230,000 completed questionnaires completed by  20,660 consumers. They find:

• Consumers’ medium-term inflation expectations remain relatively stable with respect to changes in inflation perceptions both in non-inflationary and inflationary periods.
• Higher financial literacy and lower responsiveness of inflation expectations are related.
• Higher trust in the ECB is also linked with lower responsiveness of consumer inflation expectations to transitory fluctuations.

Responsiveness of consumers’ medium-term inflation expectations: evidence from a new euro area survey
Authors: Ewa Stanisławska, Maritta Paloviita
From: Narodowy Bank Polski, Bank of Finland

Quality adjustments and the measurement of consumer inflation

In this paper, Menz et al. argue that in the euro area, the measurement of consumer price inflation must accommodate two sources of biases: one resulting from quality adjustments (QA)- the price decrease or increase due to a product’s quality improvement or deterioration – and another from the heterogeneity of national QA practices. To this date, various QA procedures are at hand for National Statistical Institutes (NSIs) in the euro area, but without any binding rules. These heterogeneous QA practices, Metz et al. suggest, might also contribute to the astonishingly large price differentials of certain products in the euro area. The authors use a macro-based approach which builds upon the official inflation series published by Eurostat and selects product categories whose prices are typically affected by quality change.

For the euro area, we assess the impact of heterogeneous quality adjustment methods by deriving the distribution of member states’ cumulative inflation rates for typical quality-adjusted products. Our macro-based estimate makes up to ± 0.2 percentage points for headline HICP inflation and ranges between ± 0.1 and 0.3 percentage points for core inflation when controlling for income differentials between member states.

Estimating the impact of quality adjustment on consumer price inflation
Authors: Jan-Oliver Menz, Elisabeth Wieland, Jens Mehrhof
From: ECB