Europe’s unusual divergence in inflation perceptions and expectations

– Perceived inflation is still high, but expectations about the future evolution of prices drop significantly
– Credibility of policy commitments could be a reason but alternative narratives about expectation formation are possible too
– Important policy lessons here and deep dive is warranted

It is widely acknowledged that household inflation expectations not only tend to exceed official inflation rates, but also that perceptions of inflation play a pivotal role in shaping these expectations.