The CNB’s new approach to the monitoring of inflation expectations of households in the Czech Republic
The CNB has monitored the inflation expectations of households since 1999. Expected inflation at the one-year and three-year horizons has been acquired by means of regular surveys. Recently, however, the values of this indicator have been highly volatile and have failed to give a clear picture of inflation expectations.
Starting in July 2007, the CNB will abandon this quantitative approach to monitoring inflation expected by households and will use a qualitative assessment of past inflation and future inflation expected by households. These indicators are collected as part of the European Commission Business and Consumer Survey, which is conducted monthly in the Czech Republic on a sample of 1,000 respondents.
The respondents are asked to provide their assessment of consumer price developments in the past 12 months and their expectations regarding consumer prices in the next 12 months. The six categories of responses are given in Table 1.
Overall indices of perceived inflation and inflation expectations of consumers are then constructed as the balance of the responses, where PP, P, M and MM are the percentages of the total of each type of response (see Table 1):
B = (PP + 1/2P) - (1/2M + MM)
For the assessment of past inflation, the balance is the difference between the weighted share of the respondents who feel that prices rose more than "slightly" and those who think prices did not rise. For inflation expectations, it is the difference between the weighted share of the respondents who expect inflation to be at least at the past 12 months' level in the next 12 months, and those who expect it to be zero or negative. The balance can theoretically range between -100 and +100. From the outlook balance and by comparison with the assessment of perceived inflation, one can judge whether the number of consumers that expect inflation to rise is increasing. Although this indicator does not provide specific expected inflation outturns, it has the aforementioned advantage of allowing expectations to be compared with the assessment of past developments.
Chart 1 shows the entire time series of perceived and expected inflation for the Czech Republic. It can be seen that perceived inflation as measured by the European Commission index has been declining since 1998. According to this indicator, Czech consumers have on average tended to think since 2002 that prices are not increasing. The balance of the responses regarding future inflation has been relatively low since mid-2004. The number of respondents expecting faster future price growth than in the past has not been much higher than those not expecting prices to rise. A slight upward trend can be seen in this indicator as from mid-2005.
The average quarterly value of the indicator of expected inflation increased by 15 points in 2007 Q2, amid a slight rise in the indicator of perceived inflation. This indicates a relatively significant shift in the responses towards higher expected inflation.