Jens Weidmann ©Frank Rumpenhorst

Weidmann: Germans’ inflation expectations are well anchored

Bundesbank President Jens Weidmann has described the inflation expectations of German consumers as “well anchored”. This was demonstrated by the initial findings of a pilot study conducted by the Bundesbank, which Mr Weidmann presented at a conference in Frankfurt am Main. The topic of the conference, which was attended by academics from around the world, was household expectations regarding economic indicators such as changes in inflation, real estate prices and consumption. The event was organised jointly with the French central bank.

Pilot study provides fresh insights

Household expectations are of direct importance to the monetary transmission process, said Mr Weidmann. The Bundesbank President explained that they are, for instance, directly related to households’ purchase intentions and can therefore also affect private consumption. “Unfortunately, we still lack frequent, detailed and quantitative data on inflation expectations of households and firms,” he continued. In order to gain a more comprehensive picture, the Bundesbank carried out an internet-based pilot study. The study focused on household expectations regarding inflation and developments in the real estate market, with households being surveyed once per month.

Households expect further rises in real estate prices

Initial figures showed that the median of inflation expectations over a twelve-month horizon was around 2% in all three of the survey waves conducted so far. “That is lower than in similar US surveys and indicates that German consumers’ inflation expectations are well anchored,” said Mr Weidmann. “Well anchored” means that the expectations are relatively stable and indicative of inflation rates that are in line with the ECB Governing Council’s target of bringing euro area inflation to levels below, but close to, 2% over the medium term. According to the current study, only a small number of people in Germany anticipate falling or very high inflation. Regarding price developments on the real estate market, the majority of respondents expect prices to rise further. Around 70% of those surveyed described house prices in their neighbourhoods as overvalued. Of those people, more than half expect prices to rise even further, with tenants predicting stronger price increases than property owners.

Communication plays a crucial role

Banque de France Governor François Villeroy de Galhau also spoke at the conference. In his speech, he likewise regretted that reliable data on households’ inflation expectations had thus far been scarce. This was particularly true of the euro area, he said. The Governor therefore welcomed the Bundesbank’s new study, which helped to close existing gaps.

Furthermore, Mr Villeroy de Galhau emphasised the vital role played by central banks’ communication with the general public. Studies have shown that, in the past, communication contributed to anchoring inflation expectations and reducing their volatility. For this reason, he called for considerable improvements in communication with the wider general public. “This lack of information prevents our communication policies from being fully efficient,” he warned.

While households are not professional forecasters, their inflation expectations usually correlate relatively strongly with market expectations, the Governor said. This has been revealed by a study from the European Commission. But in recent times, he explained, a greater discrepancy between consumer expectations and financial market indicators has been observed. As a result, he believes that there is a need for more in-depth analysis and research.