As part of the Bundesbank Invited Speakers Series, Bundesbank President Joachim Nagel discussed households’ perceptions of inflation with Michael Weber, Associate Professor of Finance at the University of Chicago Booth School of Business. 

In his opening speech, entitled “Inflation expectations and reality: implications for the last mile of disinflation”, Mr Weber presented the latest economic research findings. These showed that households’ expectations for inflation often deviated from the officially recorded inflation rates. Mr Weber explained that these deviations were linked to people’s sources of information; their perceptions were chiefly shaped by their shopping experiences and their conversations with family and friends rather than by classic media.

Everyday perceptions shape inflation expectations

Households’ perceptions of inflation chiefly pertained to products and services they regularly purchased, such as food. According to Mr Weber, the individual prices of these everyday goods had a major impact on their inflation expectations. This also explained why such expectations differed by gender: men and women often had specific products in mind when they thought of inflation (milk for women, for instance, or petrol for men). Moreover, as women shopped more frequently for day-to-day essentials, they often estimated inflation to be higher than men did. 

High inflation draws attention but makes it harder to imagine change

Mr Weber also explored the extent to which monetary policy communication by central banks can influence inflation expectations. His research showed that in times of low inflation, households paid scant attention to the subject, making it harder to communicate with them.

However, once inflation rates rose, people paid considerably more attention to price developments. They were then more receptive to information. Yet this was precisely where the challenge lay: it was difficult to convince people that inflation would fall again in future. After periods of high inflation, it could be seen that public expectations of inflation declined more slowly than actual inflation rates.

Dialogue with Bundesbank President Nagel

Under the moderation of Falko Fecht, Head of the Bundesbank’s Research Centre, Mr Weber went on to discuss with Bundesbank President Joachim Nagel how households’ perceptions of inflation influence monetary policy. Central bank communication was also a key factor here. “It is important that price stability becomes the focus of our attention,” Mr Nagel said, continuing: “Clear language, clear messages and reducing complexity in our communications are important. I believe that we need to communicate more, rather than less, and more effectively too.” The topic of financial literacy, the importance of which is still highly underestimated, in his view, also plays a key role. 

As part of the Bundesbank Invited Speaker Series, Bundesbank President Joachim Nagel discusses current research and central bank-related issues with researchers and academics. At the most recent event, he talked about resilience with economics professor Markus Brunnermeier.