The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment

Abstract

Abstract-Using a unique, randomized information experiment embedded in a survey, this paper investigates how consumers' inflation expectations respond to new information. We find that respondents, on average, update their expectations in response to (certain types of) information, and do so sensibly, in a manner consistent with Bayesian updating. As a result of information provision, the distribution of inflation expectations converges toward its center and cross-sectional disagreement declines. We document heterogeneous information processing by gender and present suggestive evidence of respondents forecasting under asymmetric loss. Our results provide support for expectation-formation models in which agents form expectations rationally but face information constraints.A fuller understanding of the public's learning rules would improve the central bank's capacity to assess its own credibility, to evaluate the implications of its policy decisions and communications strategy, and perhaps to forecast inflation.Ben Bernanke (2007)

Heterogeneous Inflation Expectations and Learning

“…Also, poorer households are more likely to be aware of rent and food price inflation (because of saliency), while richer households should arguably be more aware of prices of durable and luxury goods (see Armantier et al. ). Similarly, older households could be more sensitive to health costs.…”

“…2010, Armantier et al. ). Since we find that inflation series adjusted for the expenditure patterns of a large range of distinct demographic groups tends to be very similar to overall inflation (McGranahan and Paulson ), the differences in updating and learning that we observe are likely to be driven by different information processing rules and not distinct inflation experiences.…”

Direct Evidence on Sticky Information from the Revision Behavior of Professional Forecasters

“… Andrade and Le Bihan (2013) use the quarterly European Survey of Professional Forecasters. Armantier et al () conduct an experiment on how households revise their inflation expectations and find that 42–47% do not revise their expectations when given the opportunity.…”

Survey Measures of Family Decision Processes for Econometric Analysis of Schooling Decisions

“…Dominitz and Manski () combine expectations of returns to mutual‐fund investments elicited at 6‐month intervals with data on realized stock market performance to study how persons form expectations of future market performance. Armentier et al () study updating of inflation expectations when persons are given new information about prices. In studies concerned with schooling expectations, Stinebrickner and Stinebrickner (, ) collect a panel of beliefs about own grade performance and ability from Berea College undergraduates. Stinebrickner and Stinebrickner () use the data to model and analyze college dropout behavior and find that learning about own academic ability and grade performance plays a prominent role in determining observed college dropout.…”

“…Dominitz and Manski () combine expectations of returns to mutual‐fund investments elicited at 6‐month intervals with data on realized stock market performance to study how persons form expectations of future market performance. Armentier et al () study updating of inflation expectations when persons are given new information about prices.…”