Several reasons for these differences have been suggested. First, households’ and firms’ expectations are subject to “sticky information” and are updated more slowly than those of professional forecasts (Carroll 2003). Second, household surveys give the same weight to “informed” and “uninformed” consumers. Because uninformed consumers likely give excess weight to goods that are purchased frequently (for example, food) or have highly visible price changes (for example, gasoline), their assessment of inflation expectations can be biased upward when the prices of these products increase (Coibion and Gorodnichenko 2015; Coibion, Gorodnichenko, and Kamdar 2018a; Sousa and Yetman 2016). Yet, surveys of households and firms also have important advantages relative to surveys of professional forecasters—for instance, they can be designed to include a large number of respondents and have the flexibility to canvass different types of economic agents. For surveys of professional forecasters, bias may arise from respondents’ reluctance to reveal their expectations about inflation because they consider the information private (Cunningham, Desroches, and Santor 2010).

# 2.2. Market-based measures

The most commonly used market-based measure of inflation expectations is the breakeven inflation rate—that is, the difference between yields on comparable nominal and inflation-indexed bonds. In general, however, this difference consists of four components: expected inflation, an inflation risk premium, a liquidity premium, and other factors (Hördahl 2009; Christiansen, Dion, and Reid 2004). Hence, extracting expected inflation requires the use of strong assumptions, and any estimate of expected inflation is necessarily imprecise (Galati, Heemeijer, and Moessner 2011).

Another common market-based measure is the inflation swap rate based on derivative instruments, which again includes not only inflation expectations, but also the inflation risk premium and liquidity premium. A key advantage of the swap rate is that, unlike for break-even inflation rates, liquidity has a limited impact on its movements (Grothe and Meyler 2018). Both types of market-based measures have the advantage of being available at very high frequencies, which may help policy makers develop an understanding of how inflation expectations are formed and may be calculated at a wider range of forecast horizons than is possible using surveys. However, swap markets in EMDEs are typically insufficiently developed to allow such a measure to be reliably extracted. Therefore, central banks in several large EMDEs (for example, Brazil, Chile, Colombia, Mexico, Peru, Poland, the Russian Federation, South Africa, Thailand, and Turkey) typically derive their market-based measures of inflation expectations from inflation-indexed government bonds (Sousa and Yetman 2016; De Pooter et al. 2014).

Differences between survey-based and market-based measures. In terms of the level of inflation expectations, those derived from surveys of professional forecasters are not systematically higher or lower than market-based measures (Figure 2). However, professional forecasters’ inflation expectations tend to be close to central bank inflation forecasts, as has been shown for New Zealand and the United States (Coibion and Gorodnichenko 2015). In addition, the volatility of professional forecaster-based expectations tends to be lower than that of market-based expectations. During periods of market stress, break-even inflation rates can be particularly volatile because “flight-tonecessarily true of firms’ inflation expectations. The latter may be more important for actual inflation, because firms may incorporate expected marginal costs into their product prices.

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