Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322458 
Year of Publication: 
2025
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2025-5
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We analyze micro-level data from the Canadian Survey of Consumer Expectations through the lens of a heterogeneous-expectations model to study the state-dependent risk of inflation expectations unanchoring in low- and high-inflation environments. In our model, agents are either trend-chasing or mean-reverting forecasters of inflation. We interpret the degree of mean reversion in inflation expectations as a measure of anchoring, which varies over time with the share of agents using each approach. We find that during the post-pandemic inflation spike, trend-chasing expectations surged, resulting in a heightened risk of unanchoring expectations and entrenching above-target inflation. Furthermore, forming trend-chasing inflation expectations is associated with higher expectations for other key economic variables - such as interest rates, wages, and house prices - and a restraint in household spending. We provide additional new insights into household expectation formation, documenting that forecasting behaviors, attention, and noise in beliefs vary across socio-demographic groups and correlate with views about monetary policy.
Subjects: 
Inflation and prices
JEL: 
E70
E31
D84
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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