Anchored or de-anchored? That is the question

Abstract

This paper shows that long-term inflation expectations have become de-anchored from the ECB Governing Council's inflation aim. The long-term expectations in the ECB's Survey of Professional Forecasters have not returned to the levels that prevailed before the 2013-14 period of disinflation, and their distribution is still skewed towards lower inflation levels. Moreover, long-term expectations have become sensitive to short-term ones and to negative inflation surprises. Forecasters who participated in most of the surveys are the most responsive to short-term developments in inflation.

De-anchored Long-term Inflation Expectations in a Low Growth, Low Rate Environment

“…Both time series and panel methods confirm the previous findings (e.g. Corsello, Neri and Tagliabracci, 2021) that long-term inflation expectations have become de-anchored since the 2013 disinflation. In a low-growth environment (where the natural rate of interest is structurally low; see Brand et al, 2018) de-anchored inflation expectations increase the risk that the policy rates may hit their effective lower bound more frequently, causing the economy to remain stuck in a low inflationlow inflation expectations-low growth environment.…”

“…Motivated by the review of the monetary policy strategies by both the Federal Reserve, which underlined the importance of anchored inflation expectations, and the ECB, as well as by the persistent gap between market-based indicators of long-term inflation expectations, in this paper we update the analyses presented in Corsello, Neri and Tagliabracci (2021;CNT, henceforth) regarding the anchoring of long-term inflation expectations in the euro area and provide complementary evidence based on a panel estimation approach. We also present evidence on the correlation between long-term inflation and growth expectations, which helps us to shed light on the probability of a low interest rate environment and on the implications for monetary policy going forward.…”

Inflation Expectations in the Euro Area: Indicators, Analyses and Models Used at Banca d’Italia

“…ECB SPF long-term expectations: level-shift analysis Bulligan (2021) studies the anchoring of long-term inflation expectations exploiting the panel dimension of the Survey of Professional Forecasters. The econometric panel analysis shows, in line with Corsello, Neri Tagliabracci (2019), that long-term inflation expectations have de-anchored, as suggested by significant downward shifts in their mean level and by their sensitivity to short-term inflation news. Corsello, Neri and Tagliabracci (2021) study the evolution of the joint probability distribution of real GDP growth and inflation expectations in the euro area using the Survey of Professional Forecasters.…”

“…Such disagreement can be viewed as an alternative measure of de-anchoring (Kumar et al 2015), corroborating the findings of de-anchoring based on the level analysis. A level-shift analysis provides further evidence of de-anchoring (Corsello et al 2019). Long-term inflation expectations are level-anchored when they remain stable at the level of the central banks' target regardless of the changes in current inflation; they are shock-anchored when they do not respond to shocks.…”

“…This is evident in the fact that they have never returned to the level that prevailed before the 2013-14 period of disinflation (Figure 9, left panel). Moreover, they have become sensitive to short-term inflation expectations and to negative inflation surprises (Corsello et al, 2019). In the most recent waves, one third of the SPF participants' long-term inflation expectation were below or equal to 1.5%, compared to less than one sixth with expectations equal to 1.9% (Figure 9, right panel).…”