Various measures of inflation expectations
People’s ideas about how the price of goods and services will move in the future have a strong impact on how inflation develops. This is because expectations about price movements affect, among other things, workers’ wage demands and firms’ decisions about the price they charge for their goods and services. As a result, the Central Bank closely monitors individuals’ and companies’ firms’ expectations concerning inflation. It is important that monetary policy be conducted so as to keep inflation expectations in line with the Bank’s inflation target – long-term expectations in particular – as this fosters economic stability. The most important measures of inflation expectations are the expectations of households, businesses, and market agents, as well as the breakeven inflation rate in the bond market.
The table and documents below show short- and medium-term inflation expectations according to these measures. Household and corporate expectations are determined through Gallup surveys carried out for the Central Bank on a quarterly basis.* Since 2012, the Central Bank has carried out quarterly surveys in which market agents are asked about their expectations concerning key economic variables, including inflation. 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 risk premium that reflects bond liquidity and uncertainty about future interest rates and inflation, among other things
* In the corporate survey, which is conducted in cooperation with the Confederation of Icelandic Employers, respondents are also asked general questions about their firms’ position and prospects.
Inflation expectations (%)1
|1 year||Q2 2023||Q1 2023||Q2 2022|
|Breakeven inflation rate||-||7.9||7.1|
|2 years||Q2 2023||Q1 2023||Q2 2022|
|Breakeven inflation rate||-||6.8||6.7|
|5 years||Q2 2023||Q1 2023||Q2 2022|
|Breakeven inflation rate||-||5.2||5.3|
|10 years||Q2 2023||Q1 2023||Q2 2022|
|Breakeven inflation rate||-||4.4||4.4|
1. Gallup's most recent corporate and household infaltion expectations surveys were conducted in February and March 2022. The Central Bank's most recent market expectations was conducted in May 2022 based on the median response. Households and businesses are not asked about ten-year inflation expectations. Market agents' inflation expectations will be published next in August 2023. The breakeven inflation rate is updated at the end of each quarter.
Sources: Gallup, Central Bank of Iceland.
Various measures of inflation expectations Published 13.03.2023