Inflation Expectations, Inflation Target Credibility and the COVID-19 Pandemic: New Evidence from Germany

Abstract

Using the exact wording of the ECB's definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.

Inflation Target Credibility in Times of High Inflation

“…Before the return of inflation, i.e. until summer 2021, the credibility of the ECB's inflation target seemed to have stabilized after a one-time decrease in the early phase of the pandemic, see Coleman and Nautz (2022). The current paper shows that this outlook was overly optimistic.…”

“…If inflation expectations were firmly-anchored and inflation target credibility was high, then longer-term inflation expectations should not respond to an increase of inflation that the central bank describes as a transitory phenomenon. 1 Revisiting and updating the data of Coleman and Nautz (2022), our results suggest that the ECB's optimistic view on medium-term inflation is not shared by the public.…”

“…However, during the COVID-19 crisis, the behavior of inflation expectations in the U.S. and the euro area even contradicted standard economic theory. In fact, Dietrich et al (2022) (for the U.S.) and Coleman and Nautz (2022) (for Germany) showed that inflation expectations of consumers significantly increased at a time when inflation rates have been persistently below 2% and the economies headed to the largest reces-sion in recent history.…”

Central Bank Communication with the General Public: Promise or False Hope?

“…Miyajima and Yetman (2018) report that inflation anchors of businesses and trade unions in South Africa are consistently above the central bank's inflation target range; by contrast, the inflation anchors of analysts generally lie within it. Coleman and Nautz (2021) find that in the 2019-2021 period only between 20% and 29% percent of German households had inflation expectations that were consistent with the ECB's inflation target; most respondents expected higher inflation even though the ECB had undershot its target in those years. Likewise, Galati, Moessner, and van Rooij (2021) show that during the COVID-19 pandemic, euro area consumers' long-term inflation expectations have been de-anchored on the upside rather than on the downside.…”

Understanding Consumer Inflation Expectations during the COVID‐19 Pandemic

“…Hence, at that time, the individual's interquartile range widens by 116 percentage points. This signals a potential de‐anchoring of inflation expectations and thus reduced trust in the central banks' ability to maintain price stability, see Grishchenko, Mouabbi and Renne ( 2019 ), Apokoritis et al ( 2019 ), and Coleman and Nautz ( 2021 ). Furthermore, Armantier et al ( 2021 ) show that the increased inflation uncertainty in 2020 already had a significant effect on precautionary savings.…”