Forceful or Persistent: How the ECB’s New Inflation Target Affects Households’ Inflation Expectations

We study how households adjust their medium-term inflation expectations under the new ECB inflation targeting strategy. Survey respondents make little difference between the previous strategy of targeting inflation rates close to but below 2% and the new strategy with a 2% point target. Participants who learn about the inherent asymmetry in the ECB’s reaction to potential off-target inflation expect moderately higher medium-term inflation. Respondents asked to assume a scenario of current inflation running below target place a significantly higher probability on medium-term outcomes above 2%. In a scenario of inflation currently running above target, however, participants do not in turn expect an undershooting of medium-term inflation.

Hoffmann, Mathias, Emanuel Moench, Lora Pavlova and Guido Schultefrankenfeld (2024), Forceful or Persistent: How the ECB’s New Inflation Target Affects Households’ Inflation Expectations, ZEW Discussion Paper No. 24-082, Mannheim.