This paper illustrates the tools used at Banca d'Italia to monitor the evolution of inflation expectations and the analyses conducted to evaluate their effects on agents' choices and on macroeconomic trends. The first part discusses measures derived from the financial markets and professional forecasters. The second focuses on the expectations of households and businesses, collected through surveys. The last part analyses the effects of expectations on the real economy through macroeconomic models.
The analyses show that: (i) there are signs of de-anchoring of long-term inflation expectations; (ii) expectations influence the behaviour of households and businesses both through the income and substitution effects, in a manner that varies over time and in relation to the conditions of the economy; and (iii) they also play an important role in macro models. They contribute to determining consumption and investment through the real interest rate, wages and prices (via the Phillips curve), exchange rates and asset prices.
