Perceived Inflation Gap – Analyzing the Discrepancy Between Perceived and Published Inflation Rates

Perception of inflation, which reflects our feelings or views about inflation, is a significant yet challenging element to capture in economic analysis. Although less frequently explored and studied in the literature compared to inflation itself or inflation expectations, it directly influences the formation of inflation expectations. Its discrepancy from the actual inflation rate can lead to diminished trust in the actions of central banks and their monetary policies. The literature includes studies demonstrating substantial differences between published and perceived inflation rates (Aucremanne et al., 2007; Brachinger, 2008; Bruine de Bruin et al., 2017). Recent research by the European Central Bank reveals that average quantitative perceptions of inflation and inflation expectations are significantly higher than the actual inflation rate. Many studies document biases and a pronounced cross-sectional dispersion in inflation perceptions (e.g., Jonung, 1981; Bryan and Venkatu, 2001; Stanisławska, 2019). This project focuses on quantitatively analyzing the differences between perceived and published inflation rates. The first part of the study involves time-series analysis of inflation, inflation perception, consumer confidence indices, and macroeconomic control variables. Vector autoregressive models will be employed to identify factors influencing perceptions along with their structural impulse response functions. To supplement publicly available data on inflation and its perception, a pilot survey is planned. The survey will address price perceptions, factors influencing these perceptions, and sources of information about inflation.