The confidence-inflation nexus: synchronization patterns in economic sentiment and inflation dynamics

The present letter analyses the nexus between the Business Confidence Indicator (BCI) and the Consumer Confidence Index (CCI) on the one hand, and inflation on the other. By using data for 28 countries over an almost 20-year period (September 2005–December 2023), it explores the synchronization patterns between BCI and CCI and their interrelation with inflation during economic shocks and the recovery from these crises. Furthermore, the study of the Dynamic Conditional Correlation (DCC) between BCI and CCI with respect to the medium-dynamic curve of the volatility of inflation provides preliminary but relevant insights for policymakers into: a) the interrelation between variables; and b) their temporary (though significant) decoupling from inflation in emergency periods. The use of the volatility of inflation (instead of the mere inflation rate) also proves itself to capture precisely business and consumer sentiments, which are mostly subject to significant fluctuations.