The relationship between inflation expectations survey data and inflation

Release date
Vol. 66. No. 4. December 2003
Satish Ranchhod
Inflation expectations play an important role in shaping the inflation consequences of economic activity. Hence, they are of special importance for monetary policy. Survey measures of inflation expectations are available, but whether they are a good representation of true beliefs is a moot point. Survey measures of inflation expectations often do not track well with realised inflation rates, sometimes producing large forecast errors. Indeed, survey measures of inflation expectations often tend to track better with current or past inflation than with future inflation, raising questions as to their usefulness as proxies for true expectations. This article examines the relationship between surveyed inflation expectations and inflation in New Zealand since inflation stabilised in the early 1990s. It turns out that while survey data maybe inaccurate predictors of the level of inflation, they can still provide useful directional information regarding near-term inflationary pressures. Survey data can be used to supplement other economic indicators, giving a better indication of future inflation.