Macroeconomic fundamentals and attention: What drives european consumers’ inflation expectations?

Abstract

Using survey data on consumer inflation expectations in the European Union countries, we investigate the price, macroeconomic, attention, and geopolitical determinants of European consumers’ inflation expectations. We employ panel data regression with both fixed and random effects. We conclude that when consumers in the EU form their expectations regarding future inflation, they are determined not only by past inflation and the general macroeconomic situation, but also by selected attention variables expressing their search queries on the Internet (SVI based on Google Trends), and uncertainty concerning economic policy (EPU) steps and measures. Moreover, our baseline specification also suggests that inflation expectations of consumers in the Central and Eastern European countries are higher than those in Euro Area countries. These findings are robust to multiple specifications using individual survey indicators of expected inflation.