Central Bank publishes research on consumer expectations and behaviours and their effects on economic outcomes

15 December 2020 Press Release

Central Bank of Ireland

  • Consumption fell less severely in October than March following increased containment measures, with both periods showing a substantial reallocation of spending from outside to inside the home
  • While forced saving during the pandemic could support future spending, savings were larger for higher income households and so may be spent more slowly as a result
  • Confidence in the economy, food and energy prices, expected labour market conditions (for firms), and past economic situation (for consumers) have a strong influence on inflation expectations

The Central Bank has today published two Economic Letters. The first Letter on “The impact of Covid-19 on consumer spending”, written by Stephen Byrne, Andrew Hopkins, Tara McIndoe-Calder and Martina Sherman, describes the fall in spending during the pandemic and how this might affect the recovery in consumption going forward. The second Letter on “Inflation Expectations of Euro Area Consumers and Firms”, written by Conor Parle and Zivile Zekaite, looks at what information could be relevant for the formation of inflation expectations.

Both Economic Letters place understanding consumer behaviour at the heart of their analyses and offer important insights relevant to future policy making.

“The impact of Covid-19 on consumer spending”, uses detailed, high frequency, Central Bank card payment data, covering all personal card payments in Ireland, to show how spending changed in 2020. Two factors affected spending: reduced opportunity to spend, and reduced willingness to spend.

The Letter shows that between the introduction of the first containment measures, on 12 March, and the middle of April, total personal card spending (ATM and point-of-sale) fell by over a third. By late June, card spending was back at 2019 levels. The tightening of restrictions in October was followed by a sharp contraction in spending (11.5% on 28 October compared to the average daily card spend in October 2019). The Letter shows that consumption fell less severely in October than March following the introduction of further containment measures.

The Letter goes on to note that in 2020 there has been a substantial reallocation of spending compared with previous long-established spending patterns. The major shift is away from spending outside the home to spending inside the home.

In addition, the Letter suggests ‘Forced saving’ – evident in the rapid growth in household deposits – could support future spending, once the spread of the virus is controlled. This will depend on the scale of pent-up demand, the outlook for employment and income, and the potential for precautionary saving and who is saving. The Letter shows for example, that higher income, wealthier households in general spend relatively less out of savings.

“Inflation Expectations of Euro Area Consumers and Firms”, looks at what information is most relevant for households and businesses when thinking about future inflation. It also aims to explain why at the onset of the COVID-19 crisis inflation expectations of consumers increased, while those of firms declined.

The Letter’s results show that confidence in the economy is strongly associated with inflation expectations. Consumers’ confidence is negatively associated with their inflation expectations. In contrast, firms’ confidence is positively related to firms’ inflation expectations. This suggests a difference in the manner in which firms and consumers think about future prices.

The Letter notes that sector-specific employment expectations are also relevant for firms’ inflation expectations while the past economic situation plays a large role for consumers. In addition, observed consumer inflation and producer inflation (for firms) help explain inflation expectations. The Letter provides insights into the formation of inflation expectations that may be helpful in future policy design.


Notes to Editor

  • In “Inflation Expectations of Euro Area Consumers and Firms”, the authors’ measures of inflation expectations are obtained from the European Commission’s Business and Consumer surveys and reflect aggregated country-level information. Consumers are asked about expected consumer price developments over the coming twelve months. Firms are asked about expected selling price developments over the ensuing three months. All data is monthly and covers the period from August 2003 to May 2020. For firms in the services and retail sectors, the period begins later (June 2006) due to data limitations.
  • The Letter aims to identify whether certain information is associated by consumers and firms with inflation expectations (if at all). It does not seek to make definitive causal findings about the relationship between inflation expectations and other survey variables.
  • The full series of Economic Letters can be seen here.