Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation

Abstract

Using a novel experimental setup, we study the direction of causality between consumers’ inflation expectations and their income growth expectations. In a large, nationally representative survey of US consumers, we find that the rate of passthrough from expected inflation to expected income growth is incomplete, on the order of 20 percent. There is no statistically significant effect going in the other direction. Passthrough varies systematically with demographic and socioeconomic factors, with greater passthrough for higher-income individuals than lower-income individuals, although it is still incomplete. Higher inflation expectations also cause consumers to report a higher probability that they will search for a new job that pays more. Using our survey findings to calibrate a search-and-matching model, we find that dampened responses of real wages to demand and supply shocks translate into greater fluctuations in output. Taken together, the survey results and model exercises provide a labor market channel to explain why people dislike inflation.

Macroeconomic Expectations and Credit Card Spending

“…This result resonates with the hypothesis, proposed in Christiano et al (1999), that when making consumption decisions, consumers care about the wage Philipps curve rather than the price Phillips Curve. It is also consistent with recent work that finds a low passthrough from inflation expectations to income growth expectations (see Hajdini et al, 2022).…”

Aggregate implications of heterogeneous inflation expectations: the role of individual experience

“…We test this through a set of regressions at the individual level in Table 1. Column 1 shows that all individuals do react to current inflation events, as has been shown in other papers with information treatment (for example, Hajdini et al 2022b). These results also confirm the existence of a positive relationship between the inflation forecasts and average lifetime inflation rates, as we saw in Figure 3, even after considering current inflation.…”

“…Inflation expectations matter for decisions at both the firm and the household levels (Coibion et al 2019;Coibion, Gorodnichenko, and Ropele 2020;Hajdini et al 2022b). Given their importance, there is an increased interest in measuring them and exploring what determines their formation process.…”

“…These experiences create systematic differences in expectations across the population. In addition, Coibion et al (2019), Roth and Wohlfart (2020) and Hajdini et al (2022b) show that consumer expectations matter for their decision-making process.…”

Inflation, the Corporate Greed Narrative, and the Value of Corporate Social Responsibility

“…For instance,Hajdini et al (2022) document survey evidence indicating that inflation expectations increase the likelihood that employees will consider applying for a new job to improve their wages.…”