Bundesbank, Frankfurt - 26 September 2019
Speech in the presence of Jens Weidmann
by François Villeroy de Galhau
Governor of the Banque de France
« Household Expectations »
Ladies and Gentlemen,
It is a great pleasure for me to open - with my colleague Jens Weidmann - this
joint Bundesbank -Banque de France conference on households'
expectations. I would like to thank warmly the Bundesbank: this
FrenchGerman cooperation testifies that our two institutions can promote and
contribute to good research on a very topical policy issue. Over the past year,
the decline of market inflation expectations has been pronounced while
households' expectations have been increasing quite steadily. This divergence
is a challenge for our assessment on inflation expectations. All the interesting
papers presented in the next couple of days will illustrate how much we can
learn on inflation expectations when observing them outside financial markets.
I. Inflation expectations: a key issue for monetary policy
I.1. Policy relevance for Central Banks
Stable inflation expectations at a level close to our target are - of course - key
for our monetary policy: they provide a strong nominal anchor helping us to
stabilize inflation when facing large demand or supply shocks. Since the
1990s, management of inflation expectations through central bank
communication has become a standard tool for monetary policy. A lot of
evidence suggests that this policy has contributed to anchor inflation
expectations and to reduce their volatility, while facing strong inflationary or
deflationary shocks. The Great Financial Crisis is a good example: at that time,
solid and well-anchored inflation expectations in the euro area contributed to
counteract the strong deflationary forces affecting our economies.
However, since then, market-based measures of inflation expectations in the
euro area have been decreasing and this decline has been even more
pronounced since the beginning of 2019. This fall in market expectations has
raised some questions among central bank watchers on potential risks of
deanchoring of inflation expectations and more generally on our ability to deliver
our mandate of price stability.
I.2. The need for better information on households expectations
Let me stress that market-based inflation expectations are not the only
available measures to assess future risks of inflation. Professional forecasters
or consensus forecast provide a significantly higher figure than the 5Y/5Y ILS,
at around 1,7% rather than 1,2% to 1,3%, although all of them point out to a
decrease of inflation expectations over time (Figure 1). Market-based
measures have also some technical limitations: first, related to the liquidity of
financial markets, and second because they are affected by the evolution of
the risk premium over time. Moreover, while financial market expectations
provide information on future financing conditions, the evolution of prices and
wages depends more deeply and directly on what household and firms expect
regarding future growth and inflation. Consequently, existing surveys among
firms and households can provide very useful and valuable information on
expectations.
Better monitoring the general public's inflation expectations is not an easy task
since inflation expectations of firms or consumers are not directly observable.
For the moment, reliable data on consumers or firms' inflation expectations are
quite scarce in the euro area whereas in other jurisdictions expectation
surveys have been developed quite extensively - famous and recent
examples include the New York Fed Survey, the Tankan survey in Japan or
the different surveys developed by the Bank of England. In this respect, the
new Bundesbank household survey contributes to fill the gap and it is also an
excellent example of the recent efforts made by central banks to collect new
and better information on expectations of economic agents.
II. Communication of central banks should also target households
For the moment, our most reliable information on the general public's inflation
expectations in the euro area comes from the consumer survey conducted by
the European Commission. When comparing the different sources of inflation
expectations with consumer survey expectations, we can see that they deliver
a very different message on the level of inflation expectations, compared to
financial markets. European households perceive an inflation rate close to
10% whereas their inflation expectations are closer to 5%.
One implication of such a result is that we need to improve a lot our
communication to a more general audience. Another conclusion we can draw
is that, if households are not well aware of the level of inflation, they perceive
quite well the overall evolution of inflation over time (Figure 2). As already
pointed out by Benoît Coeuré1, while households are not professional
forecasters, their inflation expectations usually correlate very well with the
ones anticipated by professional forecasters for the same forecast horizon
(one year) (Figure 3). However, we can see over the recent period, a
divergence between consumer expectations and financial markets indicators.
Since it could strongly affect the future path of inflation, such a pattern raises
several important questions: will this divergence persist over time or is it very
temporary? What are the sources of the divergence in inflation expectations
between financial markets and households?
III. Firms' inflation expectations are also of primary interest for
Central Banks
While this conference is mostly about households' expectations, I would like to
stress that monitoring firms' inflation expectation is also of primary interest
from a monetary policy perspective.
Compared to households, information on inflation expectations within firms is
even scarcer. This scarcity of information is in sharp contrast with the
relevance of such information for the conduct of monetary policy: at the end,
firms are the price setters in the economy and also take part in the wage
setting process. Besides, there is evidence that their expectations affect their
economic decisions like employment or investment. One of the most
comprehensive evidence has been produced for New Zealand's firms,
showing that inflation expectations among business leaders are not so
different from household expectations. In Europe, Banca d'Italia has also
developed a very rich and informative firms' expectations survey since 1999.
The Bundesbank has also conducted a very interesting survey asking
tradeunions and employers what was the relevant inflation underlying the last
collective wage agreement. Comparative information on such issues across
the Euro area would be very useful. I am convinced that more analysis on
firms' expectations would produce very valuable and relevant information for
our monetary policy.
Conclusion
Let me now conclude by saying that we need to better measure consumer and
firm inflation expectations. This lack of information prevents our
communication policies from being fully efficient. One important question for
monetary policy is what kind of communication tools can be used to better
communicate with the general public and influence their inflation expectations.
This conference is a unique opportunity to benefit from the analyses of the
most distinguished experts on the various exciting issues that are related to
household expectations. I wish you very fruitful discussions. Thank you for
your attention.
Figure 1. Long term inflation expectations for the Euro area
Source: BIS report "Recent developments in the global economy" (August
2019)
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Figure 2. Households perceive quite well the overall evolution of inflation
Source: B. Coeuré (2019). Inflation expectations and the conduct of monetary policy, Speech at an
event organised by the SAFE Policy center, 11 july 2019
Figure 3. Recent divergence between the evolution of household inflation
expectations and market based-measures
Sources: ECB, European Commission