The European Central Bank has released a statistical model that converts limited-frequency survey observations into monthly estimates of inflation expectations, offering a finer-grained view of how professional forecasters adjusted their outlooks through the recent inflation episode.
The tool, created by ECB economists Benjamin Böninghausen, Léa Gosselin, Fabian Schupp and Andreea Vladu, draws on responses in the ECB Survey of Professional Forecasters and the Consensus Economics survey. Using a method that maps sparse survey data into monthly-frequency expectations, the model produces horizon-by-horizon projections for up to ten years and extends back to 1999.
How forecasters tracked the 2021-22 surge
The reconstruction reveals that professional forecasters materially underestimated both the size and persistence of the inflation surge that emerged in 2021-22. According to the model, the 12-month inflation outlook from surveyed forecasters exceeded 2% only after Russia's invasion of Ukraine in February 2022. In that month the estimated 12-month expectation jumped from 1.6% to 2.8% in a single update.
By September 2022, shortly before headline inflation reached its peak, the model shows expectations for the coming 12 months had climbed to 4.3%. The anticipated return to the ECB's 2% target was pushed out by roughly a year, even as forecasts for horizons beginning two years ahead and beyond remained close to 2% throughout the period.
After headline inflation peaked in October 2022, the monthly estimates indicate forecasters expected a 3.6% inflation rate over the next 12 months, with a return to around 2% projected sometime between mid-2024 and mid-2025. By March 2024 the model shows short-, medium- and long-term expectations converging on the ECB's 2% target.
More recent monthly estimates indicate expectations for the coming 12 months have fallen below 2%, a decline likely linked to low expected energy inflation in the short term. The model projects headline inflation bottoming out at roughly 1.8% in late 2026, before returning to levels around 2% through 2027.
Comparison with market-based measures
The ECB also used the model to compare survey-derived expectations with market-implied measures taken from inflation-linked swap rates. Once adjusted for inflation risk premia, market-based expectations were closely aligned with the survey-based monthly estimates over short and medium-term horizons during both the inflation surge and the subsequent disinflation.
Policy relevance
According to the ECB, the new modelling approach offers policymakers a tool to track how shocks feed into different horizons of inflation expectations. The bank highlighted the model's usefulness given renewed energy price pressures associated with the ongoing conflict in the Middle East, which could affect near-term inflation expectations.
The model's monthly frequency and long historical coverage aim to give central bankers and analysts a more detailed picture of expectation dynamics, while retaining the original information in widely used professional forecast surveys.
Limitations
The analysis relies on the two named survey sources and the statistical method chosen by the ECB team to interpolate monthly figures. If those inputs or the structure of the method constrain information, the monthly reconstructions reflect those boundaries rather than new independent measurements.