KDI 경제정보센터

Research Question
The beginning of the COVID-19 pandemic was characterised by high uncertainty about the future path of the economy. In this paper, we examine how consumers in Germany updated their expectations about inflation for the next twelve months in response to the COVID-19 outbreak in early 2020. In particular, we explore if different levels of exposure to COVID-19 cases in connection with the economic circumstances in the district they live in led to eterogeneous responses among consumers when updating their inflation expectations. When examining the effects of experience on expectations, we differentiate between local (how severely the district was affected by COVID-19) and personal experience (how severely the respondent was affected financially).

Contribution
We use data from the Bundesbank Online Panel Households (BOP-HH), which contains information on inflation and other macroeconomic expectations of consumers living in Germany before and during the pandemic. We match consumer expectations with district level daily indicators on COVID-19 exposure and district-level containment measures. Thus, we can examine, through panel data analysis, how inflation expectations changed due to the pandemic outbreak. Moreover, we complement the regional indicators with households’ subjective assessment of the local and personal-level experience, which could capture longer-lasting effects of the pandemic on expectations.

Results
We document a large upward shift in individuals’ inflation expectations and an increase in individual uncertainty and disagreement about the future path of inflation immediately after the COVID-19 outbreak. An increase in the 7-day incidence by 50 is associated with an average increase by 0.9 percentage points in household inflation expectations. The relationship between the virus spread and inflation expectations is amplified if consumers live in high unemployment districts. We also find that local and personal experiences matter when forming expectations. Individuals that live in districts that were negatively affected by the pandemic and those that experienced losses to their households’ finances have higher inflation expectations and are more pessimistic about unemployment, interest rates, and house prices. Our findings show that it is important to consider regional disparities when examining individual belief formation.