Inflation Expectations in Central, Eastern and Southeastern Europe: The Role of Sentiment and Experiences

How do inflation expectations of consumers in Central, Eastern and Southeastern Europe (CESEE) compare with those in Western EU countries and which factors explain them? Using survey data collected in 9 CESEE countries, we show that inflation expectations in CESEE are much higher than realized inflation rates and this gap is considerably larger than in Western EU countries. As in other studies, inflation expectations in CESEE are correlated with socioeconomic characteristics of consumers. More importantly, they are strongly affected by the general economic sentiment and crisis experiences of agents. Consumers with negative economic sentiment tend to have substantially higher inflation expectations, and this effect is even stronger for those who recall high inflation episodes in the past.