Consumers' perceived and expected inflation in South Korea

Household inflation expectations act as an important input in a central bank's inflation-targeting monetary policy formulation. This study investigates the formation of households' inflation expectations in South Korea based on a consumer survey conducted by the Bank of Korea. We use epidemiological models and find that households' inflation expectations display strong and persistent overestimation bias. Furthermore, Bank of Korea's inflation forecasts influence households' inflation expectations. The findings suggest that the strong upward bias in households' inflation expectations is consistent with the perceived inflation. The Bank of Korea needs to enhance its communication strategy to guide households' inflation expectations based on its inflation targeting.