Anchoring of Consumers’ Long-Term Euro Area Inflation Expectations During the Pandemic

Abstract

This paper analyses the results from a new monthly survey of consumers’ euro area inflation expectations before and during the pandemic. We find that consumers’ longterm euro area inflation expectations have remained elevated above the ECB’s inflation aim throughout the pandemic. Moreover, their distributions have continuously shown a greater probability of high inflation (2pp above the ECB’s inflation aim of 2%) than of deflation during the pandemic. These results suggest that during the pandemic consumers’ long-term euro area inflation expectations have been de-anchored on the upside rather than on the downside. This is in contrast to concerns by ECB policymakers about a de-anchoring on the downside during the pandemic. We find that during the pandemic consumers’ expected probabilities in the long term of deflation in the euro area have been above those from the ECB Survey of Professional Forecasters, and below those implied by options. We also find based on consumers’ point inflation expectations and on three measures calculated directly from their individual expected probability distribution, that consumers’ long-term euro area inflation expectations have been better anchored for higher education levels and for higher net household income.