{
  "title": "How Managing Inflation Expectations Can Help Economies Achieve a Softer Landing",
  "publication": "IMF Blog, October 4, 2023",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2023/10/04/how-managing-inflation-expectations-can-help-economies-achieve-a-softer-landing",
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  "summary": "Expectations increasingly drive inflation dynamics. Improvements in monetary policy frameworks can better inform people’s inflation expectations and thereby help reduce inflation at lower output cost.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Inflation reached multi-decade highs last year; headline inflation is coming down steadily, while core measures and wage growth have picked up.\n- Expectations about future inflation influence consumption and investment decisions and therefore affect prices and wages today.\n- The blog summarizes findings from Chapter 2 of the October 2023 World Economic Outlook, “Managing Expectations: Inflation and Monetary Policy.”"
    },
    {
      "heading": "Larger role for inflation expectations",
      "content": "- Near-term expectations (for inflation over the next 12 months) rose steadily starting in 2021 and accelerated last year as actual price increases gained momentum.\n- Expectations for inflation five years into the future remained stable, with average levels broadly anchored around central bank targets.\n- Near-term inflation expectations have recently begun a gradual downward path.\n- Similar patterns of inflation expectations are observed across professional forecasters, companies, individuals, and financial-market investors, on average."
    },
    {
      "heading": "Empirical findings on expectations and inflation dynamics",
      "content": "- After the inflationary shocks in 2021 and early 2022 began unwinding late last year, inflation has been increasingly explained by near-term expectations.\n- For the average advanced economy, near-term expectations now represent the primary driver of inflation dynamics.\n- For the average emerging market economy, expectations have grown in importance, but past inflation remains more relevant.\n- Quantitative pass-through estimates:\n  - In advanced economies, inflation typically rises by about 0.8 percentage points for each 1 percentage point rise in near-term expectations.\n  - In emerging market economies, the pass-through is 0.4 percentage points for each 1 percentage point rise in near-term expectations."
    },
    {
      "heading": "Differences in learning and their consequences",
      "content": "- Two learning types:\n  - Backward-looking learners: form expectations based on current or past inflation experiences, especially when information on inflation prospects is scarce or central bank communications lack credibility.\n  - Forward-looking learners: form expectations using a broader array of information relevant to future economic conditions, including central bank actions and communications.\n- Economies with a higher share of backward-looking learners tend to be those with historically higher and more volatile inflationary experience.\n- Policy consequence: when more people are backward-looking learners, policy tightening has less dampening effect on near-term inflation expectations and inflation, so central banks must tighten more to achieve the same decrease in inflation.\n- Resulting trade-off: reductions in inflation expectations and inflation come at a higher cost to output when a higher share of backward-looking learners is present."
    },
    {
      "heading": "Model simulations and policy implications",
      "content": "- A new model allowing for differences in learning and expectations formation shows:\n  - Policy tightening is less effective at reducing near-term expectations and inflation when backward-looking learners are more prevalent.\n  - Improvements in monetary policy frameworks and communications can lower the output costs needed to reduce inflation and inflation expectations.\n  - Such improvements increase the likelihood that a central bank can achieve a “soft landing” (guiding inflation back to its target without causing a deep downturn in growth and employment)."
    },
    {
      "heading": "Policy recommendations and communication strategies",
      "content": "- Strengthen monetary policy frameworks to increase independence, transparency, and credibility of monetary policy.\n- Communicate more clearly and effectively to encourage forward-looking expectations formation.\n- Use simple and repeated messaging about objectives and actions, tailored to relevant audiences.\n- Recognize that improving frameworks and communications can take time or be difficult to implement; these efforts are complementary to traditional monetary policy tightening, which remains key to returning inflation to target in a timely manner.\n\nThis blog is based on Chapter 2 of the October 2023 World Economic Outlook, “Managing Expectations: Inflation and Monetary Policy.” The authors of the report are Silvia Albrizio (co-lead), John Bluedorn (co-lead), Allan Dizioli, Christoffer Koch, and Philippe Wingender, with support from Yaniv Cohen, Pedro Simon, and Isaac Warren.\n\n---\n\n\n References\n\n- analytical chapter of the latest World Economic Outlook\n\nSource: https://www.imf.org/en/blogs/articles/2023/10/04/how-managing-inflation-expectations-can-help-economies-achieve-a-softer-landing"
    }
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    "Authors: Silvia Albrizio, John Bluedorn",
    "Published: October 4, 2023",
    "Inflation reached multi-decade highs last year; headline inflation is coming down steadily, while core measures and wage growth have picked up.",
    "Expectations about future inflation influence consumption and investment decisions and therefore affect prices and wages today.",
    "The blog summarizes findings from Chapter 2 of the October 2023 World Economic Outlook, “Managing Expectations: Inflation and Monetary Policy.”",
    "Near-term expectations (for inflation over the next 12 months) rose steadily starting in 2021 and accelerated last year as actual price increases gained momentum.",
    "Expectations for inflation five years into the future remained stable, with average levels broadly anchored around central bank targets.",
    "Near-term inflation expectations have recently begun a gradual downward path.",
    "Similar patterns of inflation expectations are observed across professional forecasters, companies, individuals, and financial-market investors, on average.",
    "After the inflationary shocks in 2021 and early 2022 began unwinding late last year, inflation has been increasingly explained by near-term expectations.",
    "For the average advanced economy, near-term expectations now represent the primary driver of inflation dynamics.",
    "For the average emerging market economy, expectations have grown in importance, but past inflation remains more relevant.",
    "Quantitative pass-through estimates:",
    "Two learning types:",
    "Economies with a higher share of backward-looking learners tend to be those with historically higher and more volatile inflationary experience.",
    "Policy consequence: when more people are backward-looking learners, policy tightening has less dampening effect on near-term inflation expectations and inflation, so central banks must tighten more to achieve the same decrease in inflation.",
    "Resulting trade-off: reductions in inflation expectations and inflation come at a higher cost to output when a higher share of backward-looking learners is present.",
    "A new model allowing for differences in learning and expectations formation shows:",
    "Strengthen monetary policy frameworks to increase independence, transparency, and credibility of monetary policy.",
    "Communicate more clearly and effectively to encourage forward-looking expectations formation.",
    "Use simple and repeated messaging about objectives and actions, tailored to relevant audiences.",
    "Recognize that improving frameworks and communications can take time or be difficult to implement; these efforts are complementary to traditional monetary policy tightening, which remains key to returning inflation to target in a timely manner.",
    "[analytical chapter of the latest World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023?cid=bl-com-AM2023-WEOEA2023002)"
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