When we probed survey respondents about their understanding of changes to “prices in general” (the Michigan Survey question), we found that a significant fraction believed we were inquiring about the prices they themselves recently paid – often prices that had increased or decreased markedly, such as those for food or gasoline. This tendency to think more about prominent price changes in one’s own experience is less common among respondents with higher financial literacy. By contrast, when we asked about expectations for the “rate of inflation,” respondents tended to think less about a few salient price changes specific to their own experiences and more about price changes across a broader set of items or about changes in the cost of living – a result that aligns more with economists’ definition of inflation as a sustained increase in the overall price level. Asking about the rate of inflation directly therefore produces answers more consistent with the concept of forward inflation expectations of interest to central banks. Chart 4 plots the time series of median responses from our experimental survey to a “prices in general” question and a rate of inflation question. One can see that the median expectation for the rate of inflation question is less variable. We also find that the dispersion of responses is significantly larger with the “prices in general” question.
The risk of fast deterioration in investor sentiment in emerging economies is high, given that the uncertainties about the strengthening of global economic growth and international trade are still significant, amid the risks arising from economic and monetary policies, the build-up of structural imbalances in the emerging economies and heightening geopolitical tensions. An abrupt adjustment of the risk premium attached to emerging economies may trigger sizeable negative consequences on the domestic environment. This is, in fact, the credit risk, or the risk of an increase in interest rate, stemming from the monetary policies of the advanced economies, the external uncertainties and the way the market reacts to these. Against this background, credit risk refers to an increase in the cost of foreign funding for both the Romanian government (Figures 19 and 20) and the banking and corporate sectors. It is noted that, in recent months, this risk has already started materialising. The Federal Reserve initiated the monetary policy tightening cycle. The Bank of England decided to increase the bank rate, which, in spite of keeping the real rate strongly negative, may act as a signal – especially amid growing uncertainties about Brexit. In one of the peer economies in the region, the Czech National Bank raised the policy rate twice – under special circumstances, after exiting from the exchange rate commitment, and in the context of a rising inflation. The European Central Bank decided to taper the asset purchase programme, even though no date has been set as yet for ending this programme.