BarcelonaWhen it is said that something can happen, it is likely to happen. This expression, used to refer to self-fulfilling prophecies, is common in the economic world. Throughout history, the belief that an event will occur has precipitated events. The list of examples is long: stock market crashes, compulsive consumer purchases, or deposit withdrawals are just a few. And citizens’ expectations for controlling inflation are also a factor to consider.
The European Central Bank (ECB), the highest monetary authority in the euro area and responsible for keeping the rise in prices stable around 2%, has long been aware of the importance of analyzing citizens’ expectations. Since 2020, the institution has surveyed about 19,000 people monthly to gauge the public’s views on future price trends. “Inflation levels recorded today can influence people’s expectations about future price trends. […] And these expectations are important, as they are the basis for people’s spending, borrowing, and investment decisions,” the ECB noted in a document prepared in 2021 reviewing its monetary policy strategy comprehensively. It added: “If expectations deviate from the central bank’s inflation target, it may be difficult for it to steer price developments back to this target.”
In a context marked by the conflict in the Middle East, an still active war in Ukraine, and aggressive tariff policies from the United States, the current outlook for the ECB is not very encouraging. According to the latest data published by the institution, citizens’ inflation expectations are widely higher than the central bank’s estimates. Europeans expect the rate to be 4% in the next twelve months and 3% over the next three years, above the ECB’s forecasts, which point to inflation of 2.6% and 2.1% in the respective cases.
the ECB’s forecasts, which point to inflation of 2.6% and 2.1% in the respective cases.
Although the monetary authority is aware that this bias is “usual”, its president, Christine Lagarde, stated in a recent appearance before the European Parliament to warn of the “implications” that a strong mismatch between perception and real figures would have. The French leader attributed these expectations to three factors: the personal experiences of each individual and their shopping basket; the fact that citizens focus more on price increases than decreases, and society’s financial knowledge.
“There is always more fear than reality. […] People tend to exaggerate, and more so in a world of immediacy and lack of analysis,” states María Ángeles Ruiz-Ezpeleta, a professor at EAE Business School, who emphasizes the importance of looking at the data on core inflation, which does not take into account the evolution of more volatile prices such as food or energy. Citizens’ perceptions, however, are also understandable, according to academics. For example, the prices of food and fuel – two products widely present in families’ shopping baskets – have risen at a higher rate compared to the average rate in recent months, while other products such as industrial goods – with a greater weight within industrial sectors – have become more expensive at a less accelerated rate.
Financial education
For the ECB, the lack of financial education also plays a relevant role in the mismatch between real figures and perceptions. According to Albert Martí, professor of finance at the UPF-Barcelona School of Management, there is a “very clear gap” in financial culture in Europe. In this regard, the expert understands the calls made by Lagarde, who urged all eurozone states to devote more efforts to promoting a society better educated in the economic field.
Martí, however, believes that the resolution of a conflict in the Middle East would completely change expectations about inflation. “In moments like the current ones, people will quickly translate [peace in Iran] into a positive effect,” he states. Despite everything, he also points out that the price of products will remain at high levels, as price increases occur much faster than decreases.
Be that as it may, experts also warn of the unpredictability of current times, with the President of the United States, Donald Trump, as the protagonist of any chapter. In just over a year in office, the world remains pending what his next crusade will be, although its effects on inflation could be minor. This is what some American media have already dubbed as “Trump exhaustion syndrome,” a principle by which citizens are outraged at the initial moment and then return to their usual routine, oblivious to the consequences of their actions.