Research Discussion Paper – RDP 1999-03 Householders’ Inflation Expectations
January 1999
Abstract
Inflation expectations have wide-reaching effects on the macroeconomy and are an important part of the transmission of monetary policy. This paper analyses the Melbourne Institute survey of householders' inflation expectations. Householders' average inflation expectations vary with personal characteristics. People with better access to information or more developed information-processing skills – such as professionals, those with more education, or older people – tend to have lower and more accurate inflation expectations. While inflation expectations are not correlated with the structural determinants of inflation (like the output gap, exchange rate movements or wages growth), tighter monetary policy does appear to reduce expected inflation. People also associate 'good times' with strong growth, low unemployment and low inflation. It is shown that householders' inflation expectations do not appear to fully incorporate information about past inflation and exchange rate movements.