By Sam van de Schootbrugge 16-12-2020

Rethinking The Traditional Measure Of Inflation

(6 min read)
Resize text:


Expectations of future inflation are a key driver of short-term price movements. When estimating inflation, policymakers assume these expectations are rational and made based on full information. Yet, recent survey data covered in a Bank of Canada working paper, shows that this is far from the case.

Instead of using Central Bank communicated information, households and firms are more likely to base expectations on personal consumer experiences. Not only does this make individuals forecasts more varied, it also makes them susceptible to structural changes, such as greater price discrimination by large retailers using big data.

Given the large disconnect that exists between inflation expectations and those assumed by policymakers, new statistical methods are needed. In addition, Central Banks should re-think the methods they use for disseminating key policy information.

TO READ THIS DEEP DIVE
SUBSCRIBE TO MACRO HIVE PRIME

£39/month thereafter

For access to our Slack Chat Room, where we discuss all things markets with our researchers and subscribers

START YOUR FREE TRIAL

MOST READ

What Determines How Wealthy You Become?

By Sam van de Schootbrugge | Dec 16, 2020
Expectations of future inflation are a key…

Higher Food and Energy Prices Spell Danger Ahead

By John Butler | Dec 16, 2020
Expectations of future inflation are a key…

Where Can you Get Higher Bond Yields?

By Caroline Grady | Dec 16, 2020
Expectations of future inflation are a key…


PREMIUM CONTENT

Inflation! What Inflation? (1 min read)

By Bilal Hafeez | Jan 11, 2021
Summary China has increased fiscal deficits, credit,…

Three Reasons for Optimism on Global Growth (2 min read)

By Caroline Grady | Jan 08, 2021
Summary Fresh COVID restrictions leave downside risks…

Which Jobs Will AI Take Over? (5 min read)

By Sam van de Schootbrugge | Jan 06, 2021
Summary A new NBER working paper reveals…

Want To Join Our Community Of Leading Investors And Researchers In Our Slack Chat Room?