How well are inflation expectations anchored at the target?
Economic Commentaries, News If the inflation target is credible, long-term inflation expectations in the economy are stable close to the target. In a new article, the authors examine how expected inflation in five years' time will be affected by the previous inflation history and the expected inflation in one year’s time.
The purpose of an inflation target is to act as a benchmark for price setting and wage formation in the economy. When economic agents have a collective picture of how prices will develop in the future, it becomes easier to plan for the long term.
For an inflation target to serve as a benchmark, it is necessary for economic agents to have confidence in it – that they expect normal inflation to be at the target. If the inflation target is credible, inflation expectations should not be affected by periods of too low or too high inflation or by macroeconomic shocks that cause inflation to deviate from the target.
In the Economic Commentary “How well are inflation expectations anchored at the target?” the authors find, among other things, that there were clear signs that the anchoring weakened during a period starting around 2014, but the anchoring seems to have been maintained relatively well during the recent high inflation. The study also shows that the expectations of money market participants are better anchored than those of other groups, seen over the entire period.
Authors: Mikael Apel, Bul Ekici and Pär Stockhammar, who work at the Riksbank's Monetary Policy Department