Inflation Expectations in CESEE : The Role of Sentiment and Experiences

We analyze inflation expectations of individuals in 9 Central, Eastern and Southeastern European (CESEE) countries adding to the growing literature on the formation of inflation expectations. The CESEE countries are a particularly interesting region in this regard given their transition history and different monetary policy regimes and the fact that little research has been done on quantitative inflation expectations for the region. Using data from the OeNB Euro Survey, a large cross-country consumer survey, we first compare inflation expectations in CESEE with those in seven Euro Area countries. Our results show that mean and median inflation expectations are considerably higher in CESEE countries. We then explain the cross-sectional differences in CESEE inflation expectations by the socioeconomic characteristics of the respondents and their sentiment and experiences. Our findings suggest a strong link between people’s economic sentiment and their inflation expectations. Respondents with more pessimistic views on the state of the economy and less trust in public institutions have significantly higher inflation expectations than others. Moreover, also people with inflation memory report relatively higher inflation expectations and the effect of economic sentiment on expectations is stronger for these respondents. With respect to the COVID-19 pandemic, we find that people who experienced financial difficulties during the pandemic tend to have higher inflation expectations