Inflation News and Euro-Area Inflation Expectations

The protracted period of low inflation in the euro area since 2013 has triggered a significant decline in long-term inflation compensation. This paper re-investigates changes in the sensitivity of inflation compensation to inflation and macro-economic news and expands existing work in two key dimensions: (i) we analyze all available (advanced) inflation releases for country and euro-area-wide inflation; (ii) we use daily frequency, time-varying sensitivity, and intraday regressions to reach more robust conclusions. Our key findings are twofold. First, timeliness is crucial in inflation markets: it is the early inflation news (flash estimates) which led to revisions in longterm compensation. Second, the anchoring of euro-area inflation expectations has weakened significantly since 2013.