An unusual criticism emerged at a recent meeting of the Bank of Korea's monetary policy committee (Monetary Policy Board). A Monetary Policy Board member criticized that "the expert expected inflation indicator appears similar each time, raising questions about whether it is properly capturing changes in economic agents' inflation expectations." At the Monetary Policy Board meeting in Oct. last year, there was also the view that asked, "Is there a way to capture expected inflation formed in the market, other than a survey of experts?"
Expected inflation is the public's subjective outlook for the future consumer price inflation rate. People make decisions on investment and consumption based on how they think prices will move, and those decisions in turn affect actual prices. Accordingly, the Monetary Policy Board considers a range of indicators that can estimate expected inflation when deciding the base rate.
Since 2002, the Monetary Policy Board has surveyed the general public on expected inflation, and beginning in 2009 it introduced an expert expected inflation survey that asks domestic economic experts—such as researchers, professors, and financial institution analysts—about prices one year ahead. Because the general public's expected inflation tended to mirror current price trends rather than the future, the intent was to improve predictability through expert expected inflation. However, the Monetary Policy Board raised the question of whether experts' projections also have weak forecasting power for inflation.
ChosunBiz examined the expert expected inflation indicators for the nine quarters from the first quarter of 2023 to the first quarter of 2025 and found that in half of them, the gap with the actual consumer price inflation rate was 0.5 percentage point or more. For example, in the fourth quarter of 2023, experts expected the consumer price inflation rate one year later to be 3%. But in Dec. 2024, consumer prices rose 1.5% from a year earlier, a difference of 1.5 percentage points from the projection.
There is also the criticism, as a Monetary Policy Board member pointed out in the minutes, that experts uniformly publish projections around 2%, the Bank of Korea's price stability target. From the fourth quarter of 2024 through the fourth quarter of last year over the span of a year, experts projected the consumer price inflation rate one year ahead to be 2% across the board.
As a result, Monetary Policy Board members are said to use the yield on inflation-linked Treasury bonds as a reference indicator instead of expert expected inflation. An inflation-linked Treasury bond is a bond whose interest revenue increases as prices rise. If prices are expected to rise, demand expands. The United States uses the breakeven inflation (BEI) index, which is the difference between the yield on inflation-linked Treasurys and nominal Treasurys.
The Bank of Korea explained that expert expected inflation reflects subjective expectations and is difficult to evaluate based on whether it accurately predicted future prices. A Bank of Korea official said, "The indicator shows how expectations about inflation are being formed at the time of the survey."