Responsiveness of Consumers’ Medium-Term Inflation Expectations : Evidence from a New Euro Area Survey

Medium-term inflation expectations of the public are a key variable of interest to any modern central bank responsible for price stability. Using the new ECB Consumer Expectations Survey, this paper investigates revisions of medium-term inflation expectations. We provide robust evidence that consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in inflation perceptions. We find that the strong adverse Covid-19 shock contributed to an increase in consumer inflation expectations. We show that both higher financial literacy and higher trust in the central bank reduce responsiveness of medium-term inflation expectations, which supports their stability. Our results increase understanding of expectations formation, which is essential for medium-term oriented monetary policy