KUALA LUMPUR, March 27 — The assessment and management of household inflation expectations is vital to central banks as these expectations can influence key economic and financial variables such as actual inflation, and households’ consumption and savings.
Bank Negara Malaysia (BNM) said other key economic and financial variables affected by inflation expectation are price- and wage-setting, spending and financial asset valuations.
In an article titled “When the Future Starts Today: Inflation Expectation of Malaysia Households” in its 2018 Annual Report released today, the central bank said this goes back to the need for having a solid understanding of how households form inflation expectations, in order for any expectation anchoring strategies to be effective.
“Inflation expectations of households in Malaysia are formed by considering both backward- and forward-looking factors, such as recent shopping experiences and current income levels, as well as the future outlook of the domestic economy,” it said.
Inflation expectations can cause a long-lasting impact to actual inflation, whereby one round of price increase triggers further rounds as inflationary psychology takes hold.
Consequently, modern central banking practices involve anticipating future inflation and managing inflation expectations to ensure price stability.
From a policy perspective, this forward-looking element opens the door to expectations management and communications as added tools of monetary policy.
Notwithstanding this, BNM said the sources of inflation expectations, as well as the actual drivers of inflation itself, need to be assessed holistically for monetary policy considerations.
“Notably, whether inflation expectations and actual inflation are demand- or supply-driven. The early 2007–July 2008 period provides a good example, a time when global commodity prices, as measured by the IMF Commodity Price Index, increased by 83 per cent, leading to rising global inflation,” it said.
Some households tend to over-predict future inflation, which is also referred to as positive expectations bias, while others may be more inclined to under-predict, which is called negative inflation expectations bias.
On average, most households’ inflation expectations in Malaysia are broadly anchored at a relatively stable rate of 1.0 per cent to 4.0 per cent, close to the actual inflation long-run average of 3.0 per cent between 1980 and 2018, though disparity is still observed
BNM said this disparity was evident in Malaysia when the inflation expectations bias was grouped by demographic groups, namely income level, household size, age, employment status and region.
Lower-income households, large households, working age individuals, households with less job security, and households in Kuala Lumpur have greater tendency for higher inflation expectations.
Some of the groups, such as lower-income households, consume more necessities, such as food, which typically exhibit higher rates of inflation.
The tendency for upward bias for these groups may also reflect their cost of living burden and concerns about insufficient income.
Indeed, a common grievance voiced by these groups is that the actual inflation rate is not reflective of the actual price increases they experience on the ground. — Bernama