Inflation Expectations in Latvia: Consumer Survey Based Results

The objective of this study is the quantification of inflation expectations in Latvia using the results of consumer surveys and the assessment of the impact inflation expectations have on actual inflation. In order to attain the objectives set, the authors of the study quantified inflation expectations applying the widely accepted probability approach and produced a small-scale VAR model capturing actual inflation and the quantified inflation expectations. Both the surveyed balance sheet data and quantified values of inflation expectations confirm that inflation expectations strengthened substantially prior to Latvia's accession to the EU. The findings of the VAR model with inflation expectations indicate that inflation expectations have a statistically significant impact on inflation in Latvia. The response of inflation expectations to inflation and domestic demand shocks is positive, although a deviation implies that the response to a domestic demand shock is not statistically significant.