The Formation Of China’s Inflation Expectation

Inflation expectation refers to the changes in the direction and magnitude of public’s exantesubjective estimation，it depends on the access to information and the public’s capabilities ofconverting the information into the desired modeling. Learning is a mechanism that people updaterules of their expectations according to the error between the actual and the predicted value.Expectation anchoring is a phenomenon that the judgment and decision-making results or targetadjust towards the the initial information to the initial anchor. This paper discussed the formation ofthe inflation expectation，and proved the presence and role of anchoring and learning by monthlydata and quarterly data.First the paper measured the public’s short-term inflation expectations using Kalman filteralgorithm with monthly data of the inflation and interest rates between1995-2012. Then the paperanalyzed the formation of inflation expectations using the survey data between2001-2012. Theresults showed: First when the environment changes suddenly, inflation expectations clearly lagsbehind the inflation, such as the expectation in the second quarter of2003; Second the public notonly learned from the past actual inflation, but also from the changes in the economic environment,such as the tendency after2005; Third the public constantly changed the anchor level of inflationexpectations and then changed inflation expectations; the public changed not only the level of theanchoring of inflation expectations, but also the duration of inflation expectations by learning;Fourth the public will fix and change the expectation according to the previous actual inflation rate.Finally，the paper proposed some suggestions for managing inflation expectations. The centralbank should establish the credibility through various strategies to guide the formation and changeof the inflation expectations, and thus stabling inflation. Such as setting the anchor of monetarypolicy, strengthening the credibility of the central bank, strengthening the exchange of informationwith the public.