MNI INTERVIEW: EZ Consumer Expectations Surprisingly Accurate
MNI (LONDON) - The inflation expectations of eurozone consumers are surprisingly in line with macroeconomic developments and can provide a useful reality check to professional forecasts, European Central Bank economist Omiros Kouvavas told MNI.
“Consumer expectations feed into consumers’ actions,” Kouvavas told an MNI podcast, adding that he expected them to continue to track the macroeconomic situation with a lag.
“If these expectations go in one direction or the other, they can give you a forecast because of your understanding of the channels of how they can feed into consumer actions,” he said, noting how professional forecasters had been slower in picking up the speed of the inflationary shocks in the wake of the pandemic.
“In some sense consumers were a bit faster in understanding that this shock was more long, medium-term than expected.”
While factors like increases in energy prices and raw materials are seen by consumers as the main inflationary forces, they increased the weight they placed on wages from June 2023 to March 2024, a period during which employees pushed to recover lost purchasing power, said Kouvavas, a contributor to a recent ECB article on how consumers view the drivers of inflation. Consumers has also reduced the weight they gave to firm profits initially.
Consumers’ inflation expectations have recently been coming down more quickly than perceptions of current inflation, he noted. As wage growth moderates, this should also be reflected in expectations, he said, adding that such surveys, while not forecasts, still provide a guide to future economic behaviour.
In the last Consumer Expectation Surveys in September, the median perception of inflation over the past 12 months fell to 3.4%. This compared to actual headline inflation of 1.7% in September, though flash data has since showed a pick-up to 2% in October.
Respondents saw inflation at 2.4% over the following 12 months and 2.1% over the next three years, quite close to the ECB’s September staff projections for inflation to fall to 1.9% by 2026.
“WISDOM OF THE CROWD”
Aggregate data can point to the “wisdom of the crowd,”Kouvavas said.
“We are many times surprised about how correct consumers are in these surveys.”
Consumers’ views are heavily affected by personal experience and expectations are higher in people from higher-inflation countries.
Greek consumers for example have much higher expectations for inflation and lower for growth than their European peers, reflecting “a high degree of pessimism that is related to a past strong economic shock” from the debt crisis.