7/2024 Gerda Kirpson. Consumer Inflation Expectations before and after the 2022 Inflation Spike: The Role of Perceived and Realised Inflation
Working Papers of Eesti Pank 7/2024
This paper examines how the formation of consumer inflation expectations in the euro area changed following the inflation spike in 2022, focusing on the relationship between expected, perceived and realised inflation. The study uses individual-level panel data from the European Central Bank’s Consumer Expectation Survey and employs a mixed-method approach to estimate fixed and random effects across two sub-periods. It finds that before 2022, inflation perceptions influenced expectations strongly, while realised inflation had no impact, but from 2022 onwards, the influence of perceptions on expectations was reduced, and realised inflation mattered. The findings, which are robust across different specifications and country-level analyses, align with the rational inattention theory, suggesting that attention to inflation information shifts with economic conditions.
