German consumers have stable inflation expectations at present, a Bundesbank pilot survey of individuals in Germany between April and June 2019 has found. The survey results reveal that more than two-thirds of respondents were expecting inflation rates of between 0% and 3% in the following twelve months and that just a small number of people in Germany were anticipating falling or very high inflation.

Pilot survey delivers fresh insights

For the pilot survey, a total of more than 4,000 individuals were asked about their expectations regarding inflation, interest rates, consumption, rents and real estate prices. Through this exercise, the Bundesbank is looking to gain a deeper understanding of how monetary policy measures, such as a cut in key interest rates, affect household consumption and investment, and to fill in existing data gaps. According to an article dedicated to this survey in the Bundesbank’s latest Monthly Report, it is not just the level of inflation expectations that matters for monetary policy, but also disagreement about expected inflation. Both could have an important impact on monetary policy transmission – that is, how a monetary policy measure impacts on economic variables such as the price level, output and employment. For example, if households were expecting prices to increase strongly, they would bring forward planned purchases as long as those prices have not yet risen too sharply. As the Bundesbank’s economists note, “This increased demand will usually lead to rising prices – the expectations are self-fulfilling in this scenario.”

Increasing importance of communication via social media

Central banks usually prefer inflation expectations to remain as stable as possible at around the monetary policy target rate of inflation of below, but close to, 2%. As long as this is the case, central banks can directly influence investment and consumption via the policy rate, note the Bundesbank’s experts. By contrast, abrupt changes in individual inflation expectations could hinder monetary policy transmission. Central bank communication via classic and also social media channels can help reduce consumer uncertainty about future inflation rates. Furthermore, studies cited in the Bundesbank’s Monthly Report article show that people who do not predominantly use classic media channels such as newspapers and television or radio news to access information about monetary policy tend to be particularly uncertain about their inflation expectations. As the Bank’s economists note, this finding supports the Bundesbank’s decision to communicate more via social media, in addition to other channels.

Majority expecting real estate prices to rise

As expectations surrounding risky, often credit-financed purchases – such as real estate purchases – are another factor affecting price developments and the stability of the financial system, the Bundesbank also surveyed households on their expectations regarding price developments in the real estate market. Around 80% of all respondents said they think real estate prices will rise further. On a nationwide average, individuals expect real estate prices to increase by just under 6% over a twelve-month period. However, expectations varied greatly from region to region, and there were also differences between various groups of people. For example, the survey found that renters are expecting stronger increases in house prices than homeowners. These and similar insights are one factor in the early identification of developments in the real estate market and thus of risks to the stability of the German financial system.

Expectation surveys to be carried out monthly in future

After evaluating the pilot survey, the Bundesbank has decided to survey household perceptions and expectations about price developments on a monthly basis in future, with the first survey expected to be carried out at the beginning of 2021. In doing so, it aims to expand the pool of data it needs to fulfil its mandates. The results are to be made available to the public immediately following each survey.