Research Discussion Paper – RDP 30 The Measurement and Explanation of Inflationary Expectations in Australia

Introduction

A recent, and continuing debate in economic theory has discussed the importance of price expectations in the context of price and wage adjustments and their relationship to unemployment. As a by-product of controversy it has been realised that previously accepted approaches to the measurement of price expectations, which involved ‘indirect’ measures, were not useful for testing the propositions around which this debate revolved. This paper first summarises the debate and its lessons for the measurement of price expectations and secondly develops a series which directly measures price expectations in Australia. This series is then tested against some traditional hypotheses about price expectation formation and finally the new series is compared with some previous attempts to measure price expectations directly.