Reactions of Household Inflation Expectations to a Symmetric Inflation Target and High Inflation

ABSTRACT We examine how households' euro‐area inflation expectations reacted to the ECB's adoption of a symmetric inflation target in July 2021, and the subsequent inflation surge. Using a randomised control trial within a monthly representative survey, we elicit short‐ and long‐term inflation expectations. We find that the ECB's strategy announcement had no material effect on expectations. In contrast, the sharp rise in actual inflation significantly raised point forecasts and expected probabilities of high inflation. These findings suggest that households' expectations became less well anchored and more sensitive to inflation realizations in the high‐inflation period, likely reflecting inter alia reduced rational inattention.