Can Inflation Expectations Be Deduced From the Development in Danish Consumption?

The real rate of interest indicates borrowing costs (or the return on an investment in financial assets), disregarding price increases. The expected real interest rate is important to investments, consumption and savings, and is therefore significant in the evaluation of economic prospects. The problem is that since the inflation expectations of investors and borrowers are not known, it cannot be observed directly. Inflation expectations can be estimated in several ways. The actual rate of inflation can be used as an approximation of the expected inflation rate, but since a period of high inflation is often followed by a period of low inflation, the actual inflation rate may be a poor measure of expected inflation. In countries whose central bank has an inflation target, the latter may be the basis for inflation expectations provided, however, that the central bank enjoys absolute credibility. Another possibility is to employ various prognoses as the basis for expectations. These can be prognoses by national authorities or international organisations such as the OECD or the IMF. In addition, a large number of private banks prepare prognoses and an average of these can be taken to express expectations. This method assumes that, on average, borrowers and investors concur with the prognoses' future expectations. The yield on index-linked bonds can be used as an approximation of the real interest rate since this yield is adjusted for inflation. A simple expression of inflation expectations can be derived by subtracting the yield on index-linked bonds from a nominal yield. However, this method entails some elements of uncertainty, due to the special characteristics and taxation terms of index-linked bonds. Questionnaire surveys are another method of charting inflation expectations. A representative selection of households or business enter-