Anna Breman: Large differences between households when inflation is high, but all are affected negatively

“When inflation is high, as it is today, everyone is affected negatively. At the same time, there are large differences between the cost-of-living increases that different households face. For some households, inflation is significantly higher than the average rate of inflation in Sweden. It is of the utmost importance that the fall in inflation continues. That is necessary for real wages to rise and for increased prosperity for households.” These comments were made by First Deputy Governor Anna Breman, when she participated in a panel discussion on the topic of “Aggregate and distributional effects of high and volatile inflation” organised by the European Central Bank.

Date: 30/08/2023 12:45

Speaker: First Deputy Governor Anna Breman

Place: Annual Congress of the European Economic Association

Anna Breman, First Deputy Governor

Anna Breman, First Deputy Governor.

Ms Breman focused on three aspects in her speech: the difference in inflation rates between households, the difference between how central banks and households perceive inflation and the difference in inflation expectations. “All of these differences tend to increase when inflation is high,” said Anna Breman.

In her speech, Ms Breman showed estimates of the rate of inflation for different household types in Sweden. “We can see that high inflation has also increased the difference between inflation for different households,” she said. And she pointed out that there are also differences within the different groups. “The negative effects have been greater for poorer households, partly because they have less scope to replace expensive goods with cheaper ones,” said Ms Breman.

Energy and food prices affect households’ perception of inflation

Anna Breman also pointed out that households’ perceptions of inflation can differ from the inflation that is measured. Recently, energy and food prices have risen very sharply. “These are goods that households have to buy and they therefore affect their perception of inflation,” she said.

Central banks, on the other hand, tend to focus on underlying inflation measures, where such prices are often excluded.

“It is important that the difference between the way in which the public perceives inflation and the way in which central banks communicate about it does not become too great. We need to explain how inflation is measured and to acknowledge that households face diverging rates of inflation to maintain high confidence in inflation targeting,” said Ms Breman.

With regard to inflation expectations, she noted that they can vary between different actors in the economy as well as between different time horizons. “The overall picture is that expectations at long time horizons have been stable during the period of high inflation, which has been important for maintaining confidence in monetary policy.”

She concluded by giving some examples of areas where more research could be needed:

  • Analysis of how differences between households’ perceived inflation affect inflation expectations.
  • Monetary policy analysis of more types of household and insights from behavioural economics.
  • Effects on the credibility of the difference between households’ perceived inflation and central banks’ communications on inflation.

“We are constantly working to improve our analysis of inflation and communication on monetary policy.  Economic research has an important role to play in increasing our knowledge in these areas,” concluded Ms Breman.

Updated 30/08/2023