Various measures of inflation expectations
People’s expectations of future developments in goods and services prices have a strong impact on how inflation develops, partly because expectations about price developments affect both workers’ wage demands and firms’ decisions on how to price their goods and services. For this reason, the Central Bank closely monitors households’ and businesses’ expectations about inflation. It is important that inflation expectations (particularly long-term expectations) be consistent with the Bank’s inflation target. This anchoring of expectations at the target is one of monetary policy’s most important contributions to economic stability. The main measures of inflation expectations are the expectations of households, businesses, market agents, and the bond market, the last of which is reflected in the breakeven inflation rate.
The tables below show short- and long-term inflation expectations according to these measures. Expectations of households and businesses are determined through Gallup surveys carried out for the Central Bank on a quarterly basis.* Market agents’ expectations are taken from a survey that the Central Bank has carried out on a quarterly basis since 2012, in which market agents are asked about their expectations concerning key economic variables. The breakeven inflation rate in the bond market is calculated from the spread between indexed and nominal bond interest rates. It should be borne in mind, however, that the breakeven rate also includes a liquidity risk premium and an inflation risk premium. The tables show the most recent values for inflation expectations, as well as the values for the previous quarter and the same quarter in the previous year.
* In the corporate survey, which is conducted in cooperation with the Confederation of Icelandic Employers, respondents are also asked general questions about their position and prospects.
Inflation expectations (%)1
|1 year||Q4 2020||Q3 2020||Q4 2019|
|Breakeven inflation rate||-||2.0||2.5|
|2 years||Q4 2020||Q3 2020||Q4 2019|
|Breakeven inflation rate||-||1.8||2.4|
|5 years||Q4 2020||Q3 2020||Q4 2019|
|Breakeven inflation rate||-||2.2||2.4|
|10 years||Q4 2020||Q3 2020||Q4 2019|
|Breakeven inflation rate||-||2.6||2.5|
1. The most recent Gallup surveys of corporate and household inflation expectations were carried out in September 2020, and the Central Bank's survey of market agents' expectations was conducted in November 2020. Expectations are based on median answers. Households and businesses are not asked about ten-year inflation expectations. The next publication of households’ and businesses’ inflation expectations is scheduled for 9 December 2020. The breakeven inflation rate is updated at the end of each quarter.
Sources: Gallup, Central Bank of Iceland.
Various measures of inflation expectations Published 1 October 2020