Measurement of perceived and expected inflation on the basis of consumer survey data
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This paper discusses measurement techniques used in the literature to quantify inflation perception and expectations on the basis of qualitative survey data. Description of quantification methods and assessment of their strengths and weaknesses is supplemented with an overview of direct measures of consumer inflation expectations in the European Union quantified with a number of techniques. Except presenting quantification methods, constraints in their interpretation and their results, the paper describes how direct measures of inflation expectations are used in central banks nowadays.Keywords:
Strengths and weaknesses
Survey data collection
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We examine the ability of the Conference Board of Canada's Index of Consumer Attitudes (ICA) to forecast Canadian household spending both nationally and regionally. Our results indicate that at the national level, the ICA is able to predict total personal consumption expenditures and various subcategories of consumer spending, even when controlling for other macroeconomic variables. We find, however, that the forecasting ability of the regional indices is somewhat weaker when compared to that of the national ICA. Overall, our results reconfirm that consumer confidence is a reliable predictor of household spending in Canada. (JEL C53 , E21 )
Consumption
Consumer spending
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Purpose:The aim of this paper is to assess the predictive power of the Consumer Confidence Indicator and its underlying components for household saving rate in the broad crosscountry settlement.Two questions are addressed in particular.First, do Consumer Confidence Indicator and its components indeed forecast future household propensity to save on their own?Second, do Consumer Confidence Indicator and its components contain any predictive power for household saving beyond economic fundamentals?Design/Methodology/Approach: The regression analysis using panel data for 14 European countries is used.Findings: Our results reveal that Consumer Confidence Indicator and most of its component questions have predictive power for the forecasts of household saving rate in both cases -as distinct predictor and as additional variable to the baseline model.Practical implications: Generally, our results support the recommendations to combine subjective (confidence indexes) and objective (economic fundamentals) indicators to achieve a broader picture and a more reliable basis for forecasts and policy assessments in the area of household finance.The results may be of special interest in terms of profound changes in consumer confidence related to the global pandemic .Originality: This study extends the knowledge in consumer confidencehousehold saving relationship and is the first analysis of consumer confidence forecasting ability for household saving settled in the broad European perspective.
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Economic indicator
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A unique previously unavailable dataset is employed to study the nature of expectations formed by manufacturing plants as they plan their own capital expenditures. Both conventional rational expectations and adaptive expectations hypotheses are found to be inconsistent with the data, which instead favor a regressive expectations formation process. These results, obtained using real-world data on plants, further develop the growing recent literature on survey expectations and the information about economic models that can be gleaned from them. (JEL E22, C23, C83)
Adaptive expectations
Investment
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The slope of the sticky information Phillips curve proposed by Mankiw and Reis (2002) is based on the degree of information rigidity on the part of firms. Carroll (2003) uses an epidemiology model of expectations and finds evidence for the U.S. of a one-year lag in the transmission of information from professional forecasters to households. Using financial institutions‟ and firms‟ survey data from Peru and the model proposed by Carroll, I estimate the degree of information rigidity for the Peruvian economy. This paper also considers heterogeneous responses and explores the cross-sectional dimension of these survey forecasts. I find that the degree of information stickiness is such that it takes between one and three quarters for updating information, a result that is robust to different specifications.
Rigidity (electromagnetism)
Information transmission
Survey data collection
Degree (music)
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Survey data collection
Survey research
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In this study we construct quarterly consumer confidence indicators of unemployment for the euro area using as input the consumer expectations for sixteen socio-demographic groups elicited from the Joint Harmonised EU Consumer Survey. First, we use symbolic regressions to link unemployment rates to qualitative expectations about a wide range of economic variables. By means of genetic programming we obtain the combination of expectations that best tracks the evolution of unemployment for each group of consumers. Second, we test the out-of-sample forecasting performance of the evolved expressions. Third, we use a state-space model with time-varying parameters to identify the main macroeconomic drivers of unemployment confidence and to evaluate whether the strength of the interplay between variables varies across the economic cycle. We analyse the differences across groups, obtaining better forecasts for respondents comprised in the first quartile with regards to the income of the household and respondents with at least secondary education. We also find that the questions regarding expected major purchases over the next 12 months and savings at present are by far, the variables that most frequently appear in the evolved expressions, hinting at their predictive potential to track the evolution of unemployment. For the economically deprived consumers, the confidence indicator seems to evolve independently of the macroeconomy. This finding is rather consistent throughout the economic cycle, with the exception of stock market returns, which governed unemployment confidence in the pre-crisis period.
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1. IntroductionFor many years, indices of consumer sentiment have been used to provide government policy makers, economic forecasters, and business managers with timely and important information on consumer attitudes. This interest in consumer attitudes reflects a widespread belief that the sentiments and expectations of individual consumers directly affect the direction of the U.S. economy. Reinforcing this belief is the fact that consumer spending accounts for about two thirds of the nation's Gross Domestic Product (GDP).Thus far, most analyses of consumer attitudes as a leading indicator of household spending have focused primarily on the predictive power of the Michigan Index of Consumer Sentiment (ICS). The results of these studies have, however, been mixed. For example, an early study by Lovell (1975) finds that measures of consumer attitudes based on the Michigan Survey of Consumers are unreliable predictors of future consumption.1 Mishkin (1978), using a stock adjustment model, shows that the ICS provides good explanatory power for changes in consumer durables. Carroll, Fuhrer, and Wilcox (1994, henceforth CFW) find that the Michigan Index has some incremental predictive power as regards forecasting household spending. Souleles (2001), using the microdata of the Michigan Survey, reports that consumer sentiment is useful in forecasting future consumption, even when controlling for a number of macroeconomic variables. On the other hand, Howrey (2001) finds that both lagged and current-quarter monthly values of the ICS are generally insignificant when control variables are present in the equations of total personal consumption expenditures (PCE), consumer spending on durable goods as well as on services.Lovell (2001) recently suggests that the Index of Consumer Expectations (ICE) developed by the University of Michigan may be a better proxy for consumer confidence than the ICS. This is because the ICE is derived solely from a subset of forward-looking questions, in contrast to the ICS, which is based on both forward-looking questions and current-conditions questions.2 In view of Lovell's (2001) insightful suggestion, the main objective of this article is to empirically examine the predictive power of the ICE in forecasting U.S. consumption growth. Moreover, it would be useful to compare the informational content of the ICE and the ICS to determine whether indices of consumer confidence reflect consumers' perception of future economic conditions.In this article, we use the reduced-form equation given in CFW (1994) to examine the forecasting ability of the ICE and the ICS. Our empirical results indicate that the lagged values of the ICE predict changes in total PCE much better than those of the ICS. Furthermore, when tested separately in the reduced-form equation, the forward-looking questions are generally significant, suggesting that they contain valuable information about consumers' expectations of future economic outlook. We also extend our analysis to the study by CFW (1994). The results of this analysis confirm the view that the ICE has greater incremental predictive power than the ICS.The remainder of this article is structured as follows: Section 2 describes the five core questions used in the Michigan Surveys of Consumers. Section 3 discusses the econometric methodology and data. Section 4 reports our main empirical results. Section 5 is a case study based on CFW's (1994) data set. Section 6 presents some conclusions.2. The Michigan Surveys of ConsumersThe ICS, produced by the Michigan Surveys of Consumers, is derived from the following five core questions:3QFPr (Financial Position realization). We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?QDurs (Durables purchases). …
Consumer spending
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Much survey data on consumer expectations is collected in the form of qualitative tendency surveys. For econometric modelling purposes it is useful to translate these into quantitative measures of the mean and dispersion of expectations. This paper develops “quantified” measures of unemployment, interest rate and inflation expectations for the US. These are compared with each other, and with direct quantitative estimates of expected inflation, and they are used to explore what factors matter for consumer perceptions of their own financial situation, and for their assessment of the economy as a whole. Mean expectations estimates form qualitative surveys appear fairly robust, but estimated standard deviations prove very unreliable.
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Consumer sentiment surveys are regularly conducted in at least forty-five countries. The surveys are based on the premise that data on consumer expectations represent a leading indicator of future changes in the macro economy. A series of Granger causality tests indicated that measures of consumer sentiment both predict and are predicted by a wide range of economic variables, although the data exhibit substantial differences across countries and across variables. The predictive performance was not found to be directly related to differences in sampling, question wording, or index construction. Several recommendations are given to enhance the predictive performance of consumer sentiment. First, a new conceptualization of consumer sentiment is now warranted based on changes in the knowledge and sophistication of consumers, the increased availability of economic information, shifts in the composition of demand, and changes due to an aging population. New survey measurement techniques are needed as well. Preliminary data on numeric probability scales indicate that there are advantages and disadvantages to a shift away from the now commonly used verbal likelihood scales. Second, new analysis models are proposed that would disaggregate consumer spending into its components as well as disaggregate the consumer data into separate demographic and economic subgroups. Third, changes in the survey administration are proposed. The shift away from telephone surveys will be due to falling response rates, especially among younger adults; the shift toward internet surveys will be due to their greater capacity to handle much more complex measurement strategies. Finally, the very notion of worldwide harmonization must also evolve; shifting its main focus from the input questions to the output indices so as to encompass a greater range of diversity in measurement methodologies. The basic premise of the consumer sentiment surveys has been affirmed by past measurements, and with appropriate developments, the consumer sentiment surveys can provide even more robust and timely forecasts of trends in the macro economy in the future.
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Consumer behaviour
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I analyze new data on subjective probabilistic expectations on house prices collected in the Spanish Survey of Household Finances. Households are asked to distribute ten points among five different scenarios for the change in the price of their homes over the next 12 months. This paper is the first empirical study to document the beliefs of a representative sample of households about the future value of their homes. It also reviews the methodology of expectation measurement and recent work on household subjective probabilities. I model individual subjective probability densities using splines, construct quantiles from those densities, and analyze how the heterogeneity in the individual distributions relates to differences in housing and household characteristics. An important result of the paper is that women are more optimistic about the evolution of house prices than men. Location at the postal code level accounts for a large fraction of the variation in the subjective distributions across households. Finally, I provide some results on how subjective expectations matter for predicting spending behavior. Housing investment and car purchases are negatively associated with pessimistic expectations about future house price changes and with uncertainty about those expectations.
Pessimism
House price
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Value (mathematics)
Investment
Quantile
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Citations (38)