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What an inflation tendency survey really measures

The Organisation for Economic Co-operation and Development (OECD) provides economic information about their member countries plus some non-member countries. One challenge they face is standardizing the various definitions of the various economic indicators to make them comparable. This means that OECD data may be different from what the national statistical offices report.

The OECD also conducts several surveys on business and price conditions. The FRED graph above shows the survey results for inflation in the euro area. The scale of the graph might surprise you, considering we’re talking about inflation, here: Are people really expecting inflation to hit 60%?! And was inflation 20% to 40% over the past few years?!

The key here is to understand exactly what is measured in this survey. Their question is as follows:

By comparison with the past 12 months, how do you expect that consumer prices will develop in the next 12 months? They will (++) increase more rapidly, (+) increase at the same rate, (=) increase at a slower rate, (-) stay about the same, or (–) fall.

Given this question, participating households aren’t describing the expected level of inflation, but rather whether inflation will go up or not. The responses are used to create an index that reflects these expectations. The index isn’t measured in a unit that’s comparable to an inflation rate. Rather, new values can only be compared with past values, thus indicating only the direction of inflation. This index is much like business condition indexes whose values do not mean anything by themselves, but are informative when compared with past values.

How this graph was created: Search FRED for and select “euro inflation tendency.”

Suggested by Christian Zimmermann.

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