Study reveals key role of inflation expectations in Norwegian pricing
A Norges Bank Staff Memo examines the significant role of inflation expectations in Norwegian price setting, particularly following the 2022-2023 inflation surge. The analysis finds that business leaders' expectations positively and significantly relate to domestic inflation, improving short-term forecasts.
Business leaders' outlook shapes Norwegian inflation
A Norges Bank Staff Memo investigates the impact of inflation expectations on price setting in Norway, focusing on the period after the 2022-2023 inflation surge.
Utilizing quarterly survey data from Norges Bank's Expectations Survey and an expectation-augmented Phillips-curve model, the study highlights the crucial role of business leaders' inflation expectations.
The analysis reveals a positive and statistically significant relationship between these expectations and domestic inflation.
Furthermore, the memo assesses the forecasting performance of expectations from various respondent groups, concluding that business leaders' and professional economists' expectations enhance short-term inflation forecasts, especially during periods of increased inflation and volatility after 2020.
This underscores the informational value of expectations, particularly in uncertain economic regimes.
From anchored to elevated expectations
Historically, short-term inflation expectations in Norway remained well-anchored near the inflation target, showing limited co-movement with CPI inflation.
However, the 2022-2023 inflation surge saw expectations increase significantly across several groups, remaining elevated since.
The study draws on Norges Bank's quarterly Expectations Survey, covering business leaders, economists, labor market organizations, and households, with data up to Q3 2025.
The analysis specifically focuses on domestically produced goods and services inflation, modelled within an expectation-augmented Phillips curve framework.
This approach allows for a direct examination of how firms' forward-looking behavior influences aggregate price setting, particularly in the presence of nominal rigidities.