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How euro area consumers adjust their medium-term inflation expectations in turbulent times

The responsiveness of longer-term inflation expectations to shorter-term economic developments plays an important role in inflation dynamics. Using the new ECB Consumer Expectations Survey conducted in the middle of the Covid-19 pandemic, this column explores how consumers adjust their medium-term inflation views in response to changes in short-term inflation expectations and inflation perceptions. Covid-19 contributed to an increase in consumer inflation expectations, but greater trust in the ECB is associated with more muted responsiveness of inflation expectations.

Central banks benefit from stable and anchored longer-term inflation expectations. Monetary policy is more efficient if the adjustment (responsiveness) of inflation expectations to transitory shocks is low; it largely limits the risk of feeding such shocks into price and wage-setting via inflation expectations. Despite the prominence of consumer inflation expectations for policymakers,1 the empirical research on adjustment of longer-term inflation expectations to short-term factors has focused so far mainly on professional forecasters and financial market participants (Garcia and Werner 2021, Łyziak and Paloviita 2017, Dovern and Kenny 2020). In the euro area, the analysis of consumer inflation expectations has been scarce due to the lack of quantitative data on expectations, especially in forecast horizons exceeding one year.  

Formation of consumer inflation expectations during recent turbulent times – i.e. at the time of the outbreak of the Covid-19 pandemic and strict lockdown measures – has been examined quite intensively by many authors (Binder 2020, Armantier et al. 2021, Coibion et al. 2020). The pandemic has also highlighted the question on the link between trust in the central bank and consumer inflation expectations (as trust reflects, among other things, consumers’ confidence in the central bank’s ability to maintain price stability). Earlier studies indicate that higher trust in the ECB contributes to better anchoring around the inflation target and better accuracy of consumer inflation expectations, as well as lower consumer uncertainty (Christelis et al. 2020, van der Cruisen and Samarina 2021). 

In our recent study (Stanisławska and Paloviita 2021), we employ the newly established ECB Consumer Expectations Survey (CES), the first source of information on euro area consumer inflation expectations in forecast horizon exceeding one year, to study formation of medium-term inflation expectations. Using survey responses of 15,000 consumers in the six largest euro area economies (Belgium, France, Germany, Italy, the Netherlands, and Spain), gathered between April and September 2020, we aim to answer to three questions. First, do medium-term (i.e. three-years-ahead) inflation expectations adjust to changes in inflation perceptions (subjective opinions about current inflation) and to changes in short-term (i.e. one-year-ahead) inflation expectations? Second, did consumers’ fears about the Covid-19 pandemic affect their views on future inflation? Third, do consumers with high trust in the ECB adjust their inflation expectations differently from those with less trust in the central bank? 

In the survey, many consumers participate in several consecutive survey rounds. This means that we can track changes in their inflation views over time. In our analysis, we take into account characteristics of individual consumers (such as age, income, education level, and financial literacy), differences in macroeconomic developments in individual economies, and common factors for all respondents (such as common monetary policy).

Adjustment of medium-term inflation expectations

The Consumer Expectations Survey data confirm earlier findings that consumers’ views of current and future inflation are systematically higher than actual inflation. In the middle of the pandemic, when the average euro area HICP inflation rate was 0.1%, perceived inflation ranged from 1.9% to 2.7%, while expected inflation – both in the short and medium term – trended downwards, reaching about 1.8% in September 2020 (Figure 1). Importantly, consumers’ assessments of inflation in the medium term were more stable than their views of inflation over shorter horizons. 

Related to the strong adverse Covid-19 shock, participants in the CES are asked to assess how seriously they are concerned about the pandemic’s influence on economic situation in the country they live in. In April 2020, about 30% of them were extremely concerned about the impacts of the pandemic on their domestic economy (Figure 2). While the average level of Covid-19 concerns decreased slightly in the next few months, the share of consumers declaring the maximum concern was still high (19%) in September 2020.

Figure 1 Aggregate views of inflation


Notes: The figure shows the level of medians based on country-specific HICP weights.     

Figure 2 Covid-19 concerns


Notes: The figure shows shares of responses to the question “How concerned are you about the impact of the coronavirus (COVID-19) on Your country’s economic situation?” where the scale ranges from 0 (not concerned at all) to 10 (extremely concerned). 

Our econometric estimates suggest that consumers adjust their medium-term inflation expectations in response to changes in their subjective views of current inflation. A one percentage point increase in inflation perceptions leads to a 0.19 percentage point increase in medium-term inflation expectations.2 The corresponding response of short-term inflation expectations is twice as large: a one percentage point increase in perceived inflation contributes to a 0.38 percentage point increase in one-year ahead inflation expectations. Lower responsiveness of medium-term inflation expectations facilitates the pursuit price stability.

We also investigate the adjustment of medium-term inflation expectations to changes in short-term inflation expectations. According to our analysis, a one percentage point increase in short-term inflation expectations contributes to 0.29 percentage point increase in medium-term inflation expectations. We obtain a somewhat lower estimate if we consider only a forward-looking component of short-term inflation expectations (i.e. changes in short-term inflation expectations that are not driven by changes in inflation perceptions). The purely forward-looking component of short-term inflation expectations – which is related, for example, to changes in wages, experts’ forecasts, and macroeconomic news – seems to play a greater role in shaping medium-term inflation expectations than inflation perceptions.

In the middle of the pandemic, adjustment in medium-term inflation expectations possibly reflects consumers’ Covid-19 concerns, apart from their shorter-term inflation views. We find that increasing concerns about the pandemic’s effects on the domestic economy contribute to significantly higher shorter-term inflation expectations and, to a lesser degree, to higher medium-term inflation expectations. This finding is in line with evidence from US, where the impact of the pandemic is mainly on short-term expectations (Armantier et al. 2021). 

The main conclusions are qualitatively unchanged if we consider individual euro area economies or qualitative inflation expectations (which measure consumers’ beliefs about the directional change of prices). Additional analyses suggest that responses of medium-term inflation expectations to positive and negative changes in shorter inflation views are symmetric. 

High trust in the ECB is related to smaller adjustments of medium-term inflation expectations

Finally, we extend our analysis of responsiveness of consumer inflation expectations by investigating whether consumers with low and high trust in the ECB adjust medium-term inflation expectations in the same way. The survey reveals that the level of trust among euro area consumers is very stable in the middle of the pandemic, averaging 5.4 on a scale from zero (not trust at all) to ten (complete trust). 

We find that consumers with high trust adjust their short- and medium-term inflation expectations to inflation perceptions to a lesser extent than consumers with low trust. The same applies to responsiveness of medium-term inflation expectations to short-term inflation expectations, even though the gain from high trust is not large enough to make consumer expectations fully unresponsive. The two groups differ also in reaction to the Covid-19 pandemic shock, as only consumers who declare low trust in the ECB increase their medium-term inflation expectations in response to the shock.


In this column we summarise new results on how changing subjective opinions on current and near-term inflation are passed to consumers’ medium-term inflation expectations and how consumers’ views of future inflation respond to fears of Covid-19 in turbulent times. From a monetary policy point of view, it is essential to monitor the degree of responsiveness of medium-term inflation expectations, as possible changes in responsiveness are useful signals in the analysis of anchoring around the inflation target.  


Armantier, O, G Koşar, R Pomerantz, D Skandalis, K Smith, G Topa and W van der Klaauw (2021), “How economic crises affect inflation beliefs: Evidence from the Covid-19 pandemic”, Journal of Economic Behavior and Organization (189): 443-469.

Binder, C (2020), “Coronavirus Fears and Macroeconomic Expectations”, The Review of Economics and Statistics 102(4): 721-730.

Christelis, D, D Georgarakos, T Jappelli and M van Rooij (2020), “Trust in the Central Bank and Inflation Expectations”, International Journal of Central Banking 16(6): 1-37.

Coibion, O, Y Gorodnichenko and M Weber (2020), “The cost of the Covid-19 crisis: Lockdowns, macroeconomic expectations, and consumer spending”, NBER Working Paper No. 27141.

Dovern, J and G Kenny (2020), “Anchoring Inflation Expectations in Unconventional Times: Micro Evidence for the Euro Area”, International Journal of Central Banking 16(5): 309-347.

García, J A and S E V Werner (2021), “Inflation News and Euro-Area Inflation Expectations”, International Journal of Central Banking 17(3): 1-60.

Łyziak, T and M Paloviita (2017), “Anchoring of inflation expectations in the euro area: Recent evidence based on survey data”, European Journal of Political Economy 46(C): 52-73.

Stanisławska, E and M Paloviita (2021), “Medium- vs. short-term consumer inflation expectations: evidence from a new euro area survey”, Research Discussion Papers 10/2021, Bank of Finland. 

Van der Cruijsen, C and A Samarina (2021), “Trust in the ECB in turbulent times”, DeNederlandsche Bank Working Paper 722.


1 ECB President Christine Lagarde pointed out in 2020: “For the actual process of setting wages and prices, it is the expectations of the public that matter most. Since our last strategy review there has been more research on how consumers and firms form their inflation expectations” (

2 We use subjective views on current inflation rather than actual inflation, as it is well documented that inflation perceptions by consumers are typically not consistent with the actual inflation figures due to behavioral biases like paying more attention to frequently bought goods or salient prices.

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