Can Croatian Consumers Predict Inflation Dynamics? RESEARCH PAPER

There exists a variety of papers dealing with the inflation generating process in Croatia. However, none of them touches upon the psychological factors driving inflation. Therefore this paper aims to fill in that niche. Applying the Carlson-Parkin method on consumer survey results, a direct measure of expected inflation is obtained. Its predictive characteristics regarding actual inflation dynamics are examined. It is found that Croatian consumers tend to produce biased expectations of actual inflation; hence they are proven not to be strictly rational in forming inflation expectations. Nevertheless, the consumers’ expectation errors are not significantly influenced by the other observed macroeconomic variables. In that regard, the consumers’ inflation expectations can be characterized as efficient in the strong sense.