Title: European Commission 2005
1European Commission Directorate General Economic
and Financial Affairs
Quantified perceived and Expected Inflation in
the Euro Area How Incentives Improve Consumers
Inflation Forecasts
Presentation by Staffan LINDÉN Joint EC-OECD
Workshop on International Developments
of Business and Consumer Tendency Surveys 14-15
November 2005
European Commission 2005
2Purpose
- Investigate whether differences in incentives to
collect information can explain the gap between
the perceived and expected inflation rates, and
the official rate. - Inflation is in general perceived and expected to
be higher than the official rate - Present the data
European Commission 2005
3Outline
- Costly information and how strong incentives to
form expectations improve projections - Data
- Stylised facts from the qualitative data
- Comparison of qualitative and quantitative data
- Time series properties
- Perceived and expected inflation when there are
incentives to collect information - Conclusions
European Commission 2005
4Main message
- Incentives to collect information on inflation
induce respondents to produce inflation rates
that are closer to the official rate. - It is important to ask questions that are
relevant, and that respondents have the
information necessary to give informed answers. - The answers to the quantitative questions behave
in a similar way as the qualitative. - The dataset is becoming unique, almost 400,000
observations just for the euro area
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5The role of costly information
- Hypothesis incentives to collect information on
inflation induce respondents to produce inflation
rates that are closer to the official rate. - There is a trade-off between informational
efficiency and the incentives to acquire
information. - It is costly to collect and process information
- If respondents have no incentives to do so, they
will not inform themselves. - This leads to noise in the indicators.
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6Three survey questions inducing people to collect
information of inflation
- Q13 How likely are you to buy a car?
- Q14 Are you planning to buy or build a home?
- Q15 How likely are you to spend any large sum
of money on home improvements? - It is assumed that these activities gives
respondents different incentives to obtain costly
information.
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7The Balance Statistic for perceived and 12 months
lagged expected inflation
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8Stylised facts regarding the qualitative data
- There are structural shifts in perceptions and
expectations after 1 January 2002. - There is a de-linkage between perceived inflation
and actual inflation. - Perceived inflation is over stated after January
2002. - Perceptions have been converging towards the
actual inflation rate. - Expectations are more in line with the actual
inflation than perceptions after January 2002.
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9Perceived and expected inflation in the euro area
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10Stylised facts continued
- Inflation perceptions and expectations fall as
income increases. - Inflation perceptions and expectations fall as
education increases. - Perceived inflation seems to increase with age,
and expected inflation is hump-shaped. - Women perceive and expect higher inflation than
men.
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11Quantitative perceived and 12 month lagged
expected inflation rates
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12What are the findings from the comparison
- Quantitative data gives the same results as the
qualitative. - The euro area data replicates the results
obtained using other similar datasets. - There has been a convergence process going on.
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13Perceived and expected inflation when incentive
to obtain information is different
- The incentives are assumed to come from the
purchase of a car, a house, or spending a large
sum of money on home improvement - Figures to compare with
- Overall perceived inflation is 11.6
- Overall expected inflation is 6.1
- Official HICP rate of inflation is 2.2
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14Perceived inflation rates depending on likelihood
to buy or invest
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15Expected inflation rates depending on likelihood
to buy or invest
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16Results from incentive induced inflation
perceptions and expectations
- The more likely respondents are to buy a car, a
house, or make home improvements, the closer the
reported inflation rate is to the official rate. - Perceptions respondents that are fairly likely
are 0.9 p.p. to 2.4 p.p. below the not at all
likely - Expectations respondents that are fairly
likely are 0.9 p.p. below the not at all
likely - The exceptions are for those respondents that are
very likely to do so
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17Adjusting for sample size
- The relatively high inflation rates for the very
likely are caused by outliers in the German
data. - Small samples are over represented in the euro
area aggregate. - Two combined solutions
- Re-group the data into two categories
- When calculating the euro area inflation rates,
adjust for both country and sample size.
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18Perceived inflation rates depending on likelihood
to buy or invest regrouped and weighted by size
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19Expected inflation rates depending on likelihood
to buy or invest regrouped and weighted by size
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20Results from incentive induced inflation
perceptions and expectations regrouped and
weighted by size
- The more likely respondents are to buy a car, a
house, or make home improvements, the closer the
reported inflation rate is to the official rate. - Perceptions respondents answering likely are
1.5 p.p. to 2.2 p.p. below the not likely - Expectations respondents answering likely are
1 p.p. to 1.8 p.p. below the not likely - The levels are still above the official rates,
but - for expectations the distance is almost halved.
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21Conclusions
- The quantitative data is of a high quality.
- It behaves well according to the benchmark.
- Incentives to obtain information on inflation
improves the survey responses. - The expectations decline by as much as 1.8 p.p.
(the overall rate falls from 6.1 to 4.3, which
still is above the official rate of 2.2). - The gap to the official rate is thus partly
explained
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22Conclusions continued
- It is important to ask questions that are
relevant, and that respondents have the
information necessary to give informed answers. - It can be useful to cut the data in different
ways to improve the survey results.
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23Relevance of the questions
- For most questions in the harmonised
questionnaires respondents have the information
readily available. - For the questions on price developments, less so.
- Different consumption baskets
- Macro-variable that requires a lot of information
to forecast - The more detailed the question, the more
information is necessary
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24Quantifying qualitative data
- Three different methods are used
- The Balance Statistic
- The Carlson-Parkin Method
- The probability approach
- The Anderson Method
- The regression approach
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25Perceived inflation quantified by using the
Carlson-Parkin and the Anderson methods
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26Expected inflation lagged 12 months, quantified
by using the Carlson-Parkin and the Anderson
methods
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27Perceived and 12 month lagged expected inflation
- the Anderson method adjusted for the structural
break
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28Correlations between perceived and expected
inflation, and actual inflation
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29Comparison with other national datasets
- The above mentioned stylised facts are present in
similar datasets from the US and Sweden. - For income, education, and gender the results are
the same. - It differs for age.
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30Correlations between quantitative, qualitative,
and actual inflation
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