Household Inflation Expectations and Their Role in Monetary Policy

Speech at the Inauguration of the Humboldt Professorship

On 1 September 2026, ECB Vice-President Boris Vujčić delivered a speech at the inauguration of the newly established Alexander von Humboldt Professorship awarded to Professor Michael Weber at the European School of Management and Technology (ESMT) in Berlin. The speech focused on how households form inflation expectations and why these expectations play a central role in monetary policy.

"Expectations about the future shape decisions and behaviour today. Expectations about inflation, income, employment, interest rates and house prices affect spending, saving, investment, borrowing and wage demands. They therefore play a key role in shaping the transmission mechanism of monetary policy."

Vujčić pointed out that monetary policy is, by its nature, forward-looking, but none of the data tracked by the Eurosystem – inflation, wages, consumption, credit, and financial conditions – in themselves reveal what households believe, how uncertain they are, or why similar shocks produce different responses across population sub-groups and countries.

Deviation from Rational Expectations

For decades, macroeconomic analysis has relied on the assumption of rational expectations. However, research over the past two decades has documented the limits of this assumption for many policy questions. Key findings from the ECB's Consumer Expectations Survey show that households systematically overestimate future inflation rates relative to both realised inflation and professional forecasts. The gap is particularly pronounced during periods of low inflation, and the distribution of expectations is considerably wider than among experts.

"Households do not form expectations in the same way as professional forecasters. Most people do not continuously process the full range of macroeconomic data. Their attention is selective, their information is incomplete, and their beliefs are widely dispersed."

The research reveals systematic demographic patterns: women generally report higher inflation expectations than men, older individuals have lower expectations, and those with higher education and financial literacy have expectations closer to official statistics. Prices of food, fuel, and housing emerge as the most salient signals in consumers' formation of aggregate inflation expectations.

BIS Global Survey: 31 Economies Under the Microscope

A global BIS survey conducted in March–April 2025 across 31 economies – both advanced and emerging markets – with approximately 1,000 respondents per country confirms that household inflation expectations are a globally elevated phenomenon:

"The upward bias in household inflation expectations relative to actual realisations as well as to professional forecasts is a truly global phenomenon."

The survey further documents that:

• Households perceiving a stronger post-pandemic inflation surge have inflation expectations that are twice as high as those with below-median perceptions.
• Households in advanced economies report a perceived real wage loss of approximately 6% since the pandemic, despite official data indicating wages have broadly kept pace with prices.
• Only about 50% of households in advanced economies and 60% in emerging markets can recognise their central bank's name, and only around half identify price stability as a central bank objective.
• Informed households – those who know their central bank's name and mandate – have significantly lower and better-anchored inflation expectations.
• Social media is an increasingly important source of information on monetary policy, particularly in emerging markets, where it surpasses TV, radio, and newspapers.
• Households report higher trust in central banks than in governments, and a majority supports central bank independence.
• The most frequently cited causes of the inflation surge are commodity prices and pandemic-related shortages; central banks are least frequently mentioned.

ECB Research on Expectation Formation

ECB Discussion Paper No 24 by D'Acunto, Charalambakis, Georgarakos, Kenny, Meyer, and Weber reviews the latest research on household inflation expectations and their implications for monetary policy. The paper documents, among other findings:

• Overreaction and extrapolation: Consumers overreact to inflation signals and extrapolate excessively based on the prices they personally observe, especially during grocery shopping. Updating is asymmetric: price increases are weighted more heavily than equivalent decreases.
• State-dependent attention: When inflation is low and stable, households markedly reduce their attention to inflation signals. At high inflation, attention rises, with over 60% of CES respondents in January 2023 indicating they were paying more attention to inflation than a year earlier.
• Stagflationary narrative: Unlike experts, consumers typically associate higher inflation with worse economic prospects and lower real income – not with stronger demand. This can mean that consumption responds negatively to higher inflation expectations in certain contexts.
• Heterogeneous behaviour: The positive consumption response to higher inflation expectations (the Euler equation channel) is primarily present among more educated, financially literate, and less liquidity-constrained consumers. For a significant portion of the population, higher inflation expectations may instead lead to reduced spending.

"Consumers' medium and longer-term expectations deviate noticeably in levels from central bank targets and, in contrast with expert expectations, often co-move more closely with shorter-term inflation news."

Communication: Reaching the Broader Public

A central conclusion in both the speech and the survey data is that central bank communication is not an afterthought but an integral part of monetary policy transmission.

• Targets over instruments: Research shows that communication about the inflation target and objective is more effective than technical communication about policy instruments when addressing broad audiences.
• Two distinct communication environments: At low inflation, the challenge is reaching an inattentive public. At high inflation, the public is easy to reach, but it is harder to convey genuinely new information since households are already closely following prices.
• The messenger matters: More diverse policy committees and communication channels can help build trust among groups that are traditionally underrepresented or harder to reach. In the euro area's multi-country context, this can enhance the overall effectiveness of communication.
• Trust and knowledge: Greater trust in the central bank is associated with better-anchored medium-term inflation expectations. Factual knowledge about the central bank's role remains limited: only about a quarter of euro area consumers were aware of the ECB's new monetary policy strategy from 2021.

"When people trust the central bank, their inflation expectations tend to be closer to the inflation target. In the end, credibility depends on what we do, and whether it matches what we say."

Data Quality and Future Challenges

Vujčić concluded by emphasising that high-quality surveys must remain a priority. Representative sampling, harmonisation across countries, repeated interviewing, and timely delivery of survey data are essential for tracking the interaction between beliefs and behaviour.

"In today's fast-paced world, the risks to survey data quality must be actively managed. Survey fatigue and the potential rise of inauthentic responses, including AI-related risks, mean that strict quality assurance is needed and the burden on respondents has to be managed carefully."

The speech closed with a tribute to Michael Weber's contributions to the field and an expectation of continued valuable insights in the years ahead.