Inflation expectations and house prices in the euro area

Abstract

Inflation and inflation expectations are of the most watched macroeconomic variables, given the central banks’ usual inflation mandate. While inflation targets usually stand at two percent, households’ inflation perceptions differ substantially. Using a panel VAR approach and data for all 19 euro area countries, this study focuses on identifying the main determinants of households’ inflation expectations and perceptions. Our findings suggest that house price fluctuations have a primary role on the formation of public inflation expectations and perceptions and thus they should be taken into considerations for the formation of monetary policy.