Australian Inflation Expectations

We build up our measures of expectations from the unit record data, which alongside the expectations questions include various questions around socio-demographic information (e.g. sex, age, income, occupation and education), the respondent's assessment of a range of economic variables (including inflation expectations) and household finances.1 This allows us to do individual-level analysis, as well as building up aggregate average time series for the total population and for certain demographic groups.

The two core expectations questions used in this paper are as follows:

Inflation expectations: Consumers are asked how they expect the 'prices of things you buy' to change over the next year; if respondents state that prices will go 'up' or 'down', they are then asked to provide a numerical estimate for the expected change.

It is worth highlighting here that these are relatively short-term expectations. Longer-term expectations are not available in the dataset, so we cannot explore their formation.

We apply some cleaning and trimming to the expectations data. Specifically, for all analysis we trim expectations (and perceptions) below -50 per cent and above +50 per cent.

For inflation expectations, we consider two different series across the analysis. One uses the remaining data as is. The other removes rounded responses (multiples of 5) from both averages and unit-level regressions. In part this is motivated by the fact that these rounded responses contribute to a large upward bias in average reported inflation expectations relative to historical inflation outcomes (approximately 2.7 per cent over the sample). While there are other methods of removing this bias, previous research has found that changes in these rounded responses tend to reflect changes in uncertainty, with households responding in round numbers when they are uncertain about actual inflation (e.g. Binder 2017; Reiche and Meyler 2022). And while uncertainty affects decision-making, the mechanism is separate to how inflation expectations affect decisions. Removing rounded responses is therefore a more transparent and well-justified approach to removing this bias than other methods.