As a result, inflation expectations represent an important link in the monetary transmission mechanism – especially through the term structure of interest rates – and greatly influence the central bank’s ability to achieve price stability. It is crucial for a central bank to monitor inflation expectations, making sure that they remain well anchored and consistent with policy objectives. Since the economy is constantly buffeted by unanticipated shocks, short-term inflation expectations should reflect the effects of these shocks. For example, if energy prices increase suddenly due to a supply disruption, short-term inflation expectations should move up. This is completely consistent with medium-term price stability, if at the same time, forward inflation expectations – that is, expectations of inflation for after the supply disruption ends – do not move. This stability of longer-term inflation expectations in the face of movements in short-term inflation expectations is the hallmark of sound, effective and credible monetary policy. In standard macroeconomic models it is trivial to measure inflation expectations: under the rational expectations assumption, any economic agent in the model could produce the unique inflation expectation for any horizon. In the real world, central banks must rely on various indirect approaches to measure inflation expectations: market-based measures, surveys of professionals such as economists and market participants, and surveys of households. All three types of measures have advantages and drawbacks. It is therefore important for a central bank to use a variety of measures that complement one another.

Given the nature of this question, the inter-quartile range is best interpreted as dispersion rather than disagreement. The results around the height of the financial crisis are striking: the median response fell from just under 3 percent to just above 0 percent as many more respondents opted for the “stayed where they are now” option. Moreover, these low median expectations of wage growth appear unaffected by the recovery in economic activity. The dispersion of responses around the median is relatively high, although lower than before the crisis. The individual uncertainty around wage growth is lower than around inflation but interestingly does show some increases coincident with accelerations in economic activity during the recovery which we don’t find in individual inflation uncertainty. Turning to the second set of general questions I started with, knowing how consumers form expectations and revise them in response to new information is relevant for many aspects of monetary policy. As noted previously, the large cross-sectional variation in inflation forecasts  BIS central bankers’ speeches  5  across survey respondents is inconsistent with the traditional rational expectations framework in which all agents are assumed to share the same information set and expectations. This has led to alternative models in which this heterogeneity is explained by a reliance of agents on different models for forecasting, the use of different information sets and different capabilities for processing information. While in a full-information, rationalexpectations world there is no role for constant central bank communication, such a role becomes crucial in a world with learning.