Assessing inflation expectations anchoring for heterogeneous agents: analysts, businesses and trade unions

Summary

Focus

The more inflation expectations are anchored, the less sensitive inflation will be to economic shocks. But the degree of anchoring may vary between different types of agents. The anchoring of businesses who set prices and, together with trade unions, negotiate wages may be most important for explaining how inflation behaves. But most studies focus on the anchoring of analysts instead, because their forecasts are more readily available.

Contribution

We use surveys of inflation forecasts for three different types of agents: analysts, businesses and trade unions. We focus on South Africa, one of the few countries for which such data is available. We then assess how well inflation is anchored for each of the types of agents. We define the inflation anchor as the expected level of inflation if there were no shocks to the economy. We model inflation forecasts as increasingly diverging from recent actual inflation towards the anchor the further into the future the forecasts look.

Findings

We find that the estimated inflation anchors of analysts are within the inflation target range of the central bank. However, those for businesses and trade unions, which are likely to be the most important for explaining inflation outcomes, are above the top end of the target range. Our results point to challenges for central banks seeking to gain credibility with agents whose decisions directly influence inflation.

Abstract

Forecasts of agents who are actively involved in the setting of prices and wages are less readily available than those of professional analysts, but may be more relevant for understanding inflation dynamics. Here we compare inflation expectations anchoring between analysts, businesses and trade unions for one country for which comparable forecasts are available for almost two decades: South Africa. Forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or "implicit anchor", towards actual inflation as the forecast horizon shortens. We find that the estimated inflation anchors of analysts lie within the 3-6 percent inflation target range of the central bank. However, those for businesses and trade unions, which our evidence suggests may be most relevant for driving the inflation process, have remained above the top end of the official target range. Our results point to challenges for central banks seeking to gain credibility with agents whose decisions directly influence inflation.

JEL classification: E31, E58

Keywords: inflation expectations, inflation anchoring, decay function, inflation targeting