Tashkent, Uzbekistan (UzDaily.com) -- Experts from the Institute for Macroeconomic and Regional Studies (IMRI) analyzed how the difference between household inflation expectations and current inflation affects the effectiveness of monetary policy.

It is known that inflation expectations have a negative impact on the inflation rate through the following channels:

1. Demand channel. People’s expectation of future price increases results in growth of their current spending.

2. Supply channel. The expectation of future price increases leads people to demand higher wages.

This, in turn, has a direct impact on the effectiveness of monetary policy and macroeconomic stability.

Inflationary expectations are the expectations of the population regarding the future level of inflation.

Sometimes there are deviations from rationality in the formation of inflationary expectations on the part of the population. That is, the unreasonable growth of the population’s expectations is influenced by:

- the population believes that the prices of electronics and cars are growing, but the improvement in the quality of goods is often not taken into account;

- rising housing prices affect the inflation expectations of the population, although it may have the effect of speculative actions;

- the population makes decisions based on the prices for the consumer basket of goods and services that it consumes.

In order to prevent unreasonable excess of inflationary expectations of the population, central banks implement an inflation targeting policy, i.e. advance inflation for the next period. However, the effectiveness of this policy is measured by the level of public confidence in the central bank. And confidence depends on the gap between inflation expectations and current inflation.

According to the results of the analysis, it was revealed that in the conditions of Uzbekistan, with an increase in inflationary expectations of the population by 1%, the consumer price index will increase by 0.53%.

At the same time, the difference between the expectations of the population and the current inflation in Uzbekistan is about 4%. Therefore, even if the government announces a 10% inflation target, the public generally expects prices to rise above that level. In particular, according to IMRI calculations, in the case of Uzbekistan, the simple (decision-making based on the past) inflation rate is 11.1%, flexible (based on the past and present) - 13.5%, and rational (based on the past, present and future ) - 18.2%.

Therefore, the reduction of the gap between inflationary expectations and current inflation, the stabilization of the economy after short-term fluctuations helps to keep inflation at the target level. To prevent such situations, the Central Bank needs to be realistic in targeting (containment) inflation. In addition, it is necessary to announce the level of social inflation (the basket of goods consumed by the majority of the population) in order to prevent unreasonable public anxiety about rising prices. In addition, improving the financial literacy of the population and involving independent experts in assessing the level of inflation will reduce the above risks.