Although the interbank rates, that is, the rates banks pay when borrowing from one another, have fallen they are still much higher than the average rate in recent years. The TED spread in the United States and the euro area is for example three times higher than the average. The housing market in the United States has not yet bottomed out. If new large loan losses arise in the financial system again this may shake market confidence once again. Over the past few days a large amount of new information has been received regarding the situation in the US economy. Inflation in the United States remains high. This is largely due to the increasingly high food prices, as well as high energy prices. However, the rate of wage increase has slackened. Inflation in the euro area is also affected by the higher energy and food prices. However, growth appears to have been stronger than we had expected for the United States in the most recent quarter, as well as in the euro area, particularly Germany. At the same time, there are indicators for both the United States and the euro area pointing to a slowdown in the second quarter. International developments affect us all, both you as entrepreneurs and Sweden as a whole. We have assumed that foreign trade will slow down in the future, as world growth is expected to continue slackening. Orders from the export market have so far declined in 2008.

To our knowledge, these results provide the first direct evidence regarding a meaningful link between survey-based inflation expectations and actual behavior.32 In the second experiment, we studied the formation process of inflation expectations by looking at whether and how survey respondents updated their inflation expectations when they received relevant new information.33 Specifically, we first elicited inflation expectations. We then randomly provided information to a subset of respondents on either past food price inflation, or professional economists’ forecasts of future inflation from the SPF. Finally, we reelicited respondents’ inflation expectations, and studied whether they were correlated with the information content of the signal they received.34 We found that respondents, on average, updated their inflation expectations in response to the information provided, and they did so sensibly and in a direction consistent with Bayesian updating – with larger revisions for less informed respondents and for those with greater baseline uncertainty. Further, there was significant heterogeneity both in how fully informed respondents were about objective inflation measures and in their updating behavior. This finding points to the potential importance of allowing for heterogeneous informationprocessing rules in our economic models. These findings are also consistent with existing sticky-information models of expectations formation, since cross-sectional disagreement falls after the provision of information.35 Results from the experiment also indicate that expectations about changes in the “prices you pay,” like the similar Michigan survey question about “prices in general,” are more responsive to information about food prices than expectations about the rate of inflation.