Inflation expectations and dynamics in the Euro Area: implications for monetary policy.

Details

Supervisors

RYCHALOVSKA, Yuliya

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

enThis study examines whether household inflation expectations help to better explain the Euro Area inflation dynamics than professional forecasters' expectations, and also to check if this relationship varies across different inflation periods. Based on Coibion and Gorodnichenko (2015)'s finding of "missing disinflation" in the United States during the Great Recession, this study adapts their framework to the Euro Area, using the Consumer Expectations Survey introduced in 2022 at the aggregate level and 2020 for six pilot countries (Belgium, Germany, Spain, France, Italy, Netherlands), and the Survey of Professional Forecasters available since 1999. Using quarterly data from 2001 to 2026 Q1, two complementary specifications are estimated: an expectations-augmented Phillips curve, and a forecast-error regression testing whether inflation surprises remain predictable from information available at the time forecasts were made. The SPF versus CES comparison is made from 2022 to 2026 Q1 because CES is a recent survey covering a short time window. The results show a clear steepening of the Euro Area Phillips curve since 2022, that remains robust even after controlling for energy price shocks. On the common comparison period, the CES-based specification fits realized inflation better than the SPF-based one (higher R-squared, lower RMSE). Moreover, the SPF forecast error remains significantly predictable from the output gap known at the time when the forecast was made, while the CES forecast error does not. A robustness test controlling for energy prices shows that a part of the SPF's predictable error is due to the unanticipated energy price increases rather than to the output gap itself. These findings suggest that, for the Euro Area's post-pandemic inflation episode, household expectations captured the inflation dynamics that professional forecasts missed.