The role of inflation expectations in the path to 3%: understanding expectations formation and calibrating the models (WP/26/10)

The role of inflation expectations in the path to 3% We examine how quickly expectations adjust, the role of forward- and backward-looking information, and the implications for the calibration of models, inflation dynamics and central bank communication. Drawing on the experience of the 2017 shift from a target of 6% to 4.5%, we highlight the influence of macroeconomic conditions and public attention on expectations formation. We find that prior beliefs typically play a dominant role in shaping the current expectations of survey respondents. While there is variation across groups and macroeconomic conditions, when respondents update their beliefs using new information, they tend to rely more heavily on information about the target than historical inflation. Empirical results for the most recent period (ending 2025Q1) suggest that financial analysts and trade unions have greatly increased their focus on the target, whereas firms rely on their prior beliefs and historical inflation to a greater extent. Given that inflation was 3.5% in November 2025, the factor most likely to delay the convergence of firms’ inflation expectations towards 3% is the time taken for decision-makers to update their beliefs from those formed in response to post-COVID-19 inflation and a higher inflation target.