Inflation surprises and inflation expectations in the euro area

Since 2013 the inflation rate in the euro area has fallen steadily, reaching all-time lows at the end of 2014. Market-based measures of inflation expectations (such as inflation swaps) have also declined to extremely low levels, which suggests increasing concern about the credibility of the ECB in maintaining price stability. Inflation releases have often surprised analysts on the downside. Our analysis shows that market-based inflation expectations, at medium-term maturities, are affected by these ‘surprises’, over and above the impact of changing macroeconomic conditions and oil prices.