A study on anchoring Swedish inflation expectations in times of turbulence

Abstract

This study examines the anchoring of inflation expectations in Sweden during the period characterised by volatile energy prices and elevated inflation. Using inflation expectations data from Swedish households (HH) and money market participants (MMP) through June 2024, as well as financial market participants (MB) up to April 2023, we employ a kernel-based regularised least squares model to estimate pointwise marginal responses. A Markov Regime Switching Autoregressive model is subsequently applied to identify structural breaks characterised by regime shifts in marginal responses to energy price and underlying inflation, respectively. Our findings indicate that recent turbulence has triggered multiple breaks, Specifically, MMP 1-year expectations oscillate between being anchored and unanchored in response to energy price inflation, whereas MMP 5-year expectations remain anchored to energy price shocks but exhibit shifts in persistence and volatility. Additionally, we find that all inflation expectations remain anchored to underlying inflation despite the turbulence. This suggests that recent fluctuations in inflation expectations can largely be attributed to energy price inflation. These results contrast with those derived from models that exclude structural breaks, underscoring the importance of incorporating dynamic features when assessing the anchoring of inflation expectations.