When did inflation expectations in the Euro area de-anchor?

ABSTRACT

Long-term inflation expectations in the Euro area (EA) remained well anchored during the global financial crisis. Less is known about the following period. By investigating whether inflation expectations have become sensitive to the arrival of economic news, this article empirically analyzes the behavior of inflation expectations in the EA during the most recent period. It finds evidence that the de-anchoring of expectations started in December 2011 and never reversed. This is in line with the more aggressive stance held by the European Central Bank (ECB) in the following months as well as with the pattern of ECB Professional Forecasters’ expectations.

KEYWORDS:

• Inflation expectations
• ECB
• Euro area
• de-anchoring

JEL CLASSIFICATION:

• E31
• E52
• E58
• C22

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Gurkaynak et al. (2010); Ehrmann (2015) among the former strand of the literature and Ehrmann, Eijffinger, and Fratzscher (2012) among the latter.

² Our results are in line with other studies addressing similar questions through different approaches. Buono and Formai (2016) show that short-term inflation expectations by the Professional Forecasters interviewed by Consensus Economics started falling in 2012. Pagenhardt, Nautz, and Strohsal (2015) find that expectations in the EA became less well anchored since September 2011. Miccoli and Neri (2015) find that medium-term market-based inflation expectations are affected by inflation surprises. We would like to thank Alessandro Flamini for this and other insightful comments.

³ Forecasts, actual values, dates and hour of the announcements were obtained by Thomson Reuters and by Investing.com.

⁴ In fact some observations are to be excluded from the tests so as to allow for a minimum number of observations both at the beginning and at the end of the sample.

⁵ We controlled for the presence of additional structural breaks through the Bai and Perron (2003) algorithm for the simultaneous detection of multiple breakpoints. The test confirms the presence of a unique structural break in the series.

⁶ We thank an anonymous reviewer for pointing this out.

⁷ Inference is based on SEs that are robust to heteroskedasticity. In unreported results we find that robustifying the SEs also for serial correlation (order 1, 2 or 3) is completely immaterial.