Consumer and Professional Inflation Expectations – Properties and Mutual Dependencies

Abstract

Inflation expectations are a crucial variable for central banks. However, empirically examining their properties is challenging. This paper juxtaposes the properties of consumer and professional expectations. It also assesses the degree of forward- and backward-lookingness and the information content of expectations. We apply entropy-based measures (common information and mutual common information) to capture nonlinear dependencies and dynamic time warping to account for different lags in the relationships. The study covers 12 inflation-targeting economies from the European region. The results suggest that in most countries, professionals are more forward-looking, and consumers follow professionals. Both groups of economic agents present expectations that are aligned in terms of information content. However, cross-country differences occur. These results imply that, from the central bank’s point of view, communication and practices designed to shape expectations, even if understood mostly by specialists, are effective also for consumers. The novelty of this study lies in its use of alternative methods to tackle the formation and dependencies between heterogeneous expectations. This avoids the drawbacks of a standard approach and allows broader conclusions to be drawn.

Keywords

• inflation expectation
• mutual information
• dynamic time warping