RDP 2024-07: How Do Households Form Inflation and Wage Expectations? 7. Conclusion

Overall, the results in this paper suggest that households' short-term inflation and wage expectations are formed somewhat differently. The former appear less forward looking, and more focused on supply-side developments, while the latter are potentially more forward looking and focused on demand-side drivers of the economy. This finding is consistent with international studies, such as Jain et al (2022).

While further work is needed to draw strong conclusions, these findings do potentially present some challenges to policy. If households don't associate weakening economic conditions with lower inflation, this can make the central bank's job harder. Communicating that the central bank is raising rates to lower aggregate demand may do less to inflation expectations if people don't link weaker conditions to lower inflation. Moreover, people may be less willing to face weaker conditions to bring down inflation if they don't see a trade-off. And messaging that inflation will be higher or lower in the future may have unintended consequences if the central bank and consumers think about inflation differently.

This paper has provided some initial stylised facts and relationships. However, more work is needed to draw stronger conclusions about causal relationships, mechanisms, and therefore policy lessons. Nevertheless, the findings generally point to the value of targeted and clear communication, as well as explanatory and educational material regarding economic channels and policy strategy.