(source: Sme)
Slovaks are convinced that prices are growing at a much higher rate than they actually are, and do not believe that the situation will improve this year. Exaggerated inflationary expectations complicate the central bank’s efforts to ensure that more expensive food and energy do not spill over into the entire economy.
In January, consumers on average expected consumer prices to rise by 32 percent in 2023, more than three times the forecast of the National Bank of Slovakia, the country’s central bank. Slovaks similarly overestimate current inflation when, based on their estimate, prices rose by 35 percent year on year in January, more than double the reality. The officially measured inflation was at 14.9 percent, Michal Marenčák, analyst with National Bank of Slovakia (NBS), wrote in a central bank blog.
The average expected inflation (red line), the average perceived inflation (blue) and the official year-on-year inflation HICP (black).
Source: The Statistics Office/NBS
“We know that people perceive inflation based on products they like to buy, but also on the basis of their own life experience or cognitive skills,” wrote Marenčák, adding that food prices grew approximately one-quarte last year. Housing costs and fuel prices also increased. “These items are the most visible to people, so it's not surprising that people sensitively perceive inflation and even higher than officially measured.”
In general, women, the elderly, the less educated, the unemployed and those with lower income perceive and expect higher inflation on average than others.
People also associate inflation with bad times in the entire economy. Marenčák noted that they expect higher inflation with meager economic growth and high employment, and vice-versa. The current economic development can reinforce this understanding of economic relations, but similar episodes are rather exceptional in the economy.
“Experts associate inflation with the overheating of the economy, and thus with good times,” wrote Marenčák. “This observation is also true about many other countries.”
The analyst estimates that people’s inflation expectations should decline with a decrease in food price inflation. A slower increase in the prices of agricultural crops on global markets is already mitigating the cost pressures of food producers. Gradually, food prices in stores in Slovakia are expected to switch from galloping to trotting.
“Reduction in inflation perceptions and so expectations should then follow,” wrote Marenčák.
But even if inflationary expectations are finally tamed, there will probably remain a significant difference between feelings and measured values.
“The message for central banks is the need for the clearer communication of what is happening in the economy, forecasts and monetary policy,” wrote Marenčák. “People make decisions based on their perceptions and expectations, for example on how much to save or whether and what to buy.”
