What Matters in Households’ Inflation Expectations?

Abstract

We provide evidence that households discretize their inflation expectations so that what matters for durable consumption decisions is the broad inflation regime they expect. Using survey data, we document that a large share of the adjustment in the average inflation expectation comes from the change in the share of households expecting stable prices; these households also consume relatively less than the ones expecting positive inflation. In contrast, variations of expectations across households expecting a positive inflation rate are associated with much smaller differences in individual durable consumption choices. We illustrate how this mitigates the expectation channel of monetary policy.

Medium- vs. Short-Term Consumer Inflation Expectations: Evidence from a New Euro Area Survey

“…Schneeweiss et al, 2010), especially in period of changing level of uncertainty. Thirdly, as recently emphasized by Andrade et al (2020), changes in broadly defined qualitative inflation expectations might play a greater role in economic decisions of consumers than adjustments in expected inflation rate within single qualitative categories. For these reasons, we complement analysis of adjustments of quantitative inflation expectations with analogous analysis based on qualitative opinions.…”

“…by Arioli et al (2017), European Commission (2014, Stanis lawska (2019) and Stanis lawska et al (2019). Other recently examined aspects include, for example, formation of inflation perceptions and expectations as well as the role of inflation expectations in consumers' economic decisions (Abildgren and Kuchler, 2021;Andrade et al, 2020;Duca-Radu et al, 2020;Easaw et al, 2013).…”

Clear, Consistent and Engaging: ECB Monetary Policy Communication in a Changing World

“…The fact that households have very dispersed or high inflation expectations does not mean that these viewpoints are not informative or unimportant as regards economic outcomes. For instance, Andrade et al (2020) show that household consumption depends on the broad inflation regime anticipated. More specifically, they find that households expecting positive inflation will consume more than households expecting that prices will remain stable.…”

“…21 The wider public's perceptions of inflation vary greatly, with many households seeing a large increase in housing and daily expenses which they associate with a negative impact on their purchasing power and the value of their savings. 22 In such an environment, households generally struggle to 21 Andrade et al (2020) show that the inflation regime is what matters more in terms of the general public's consumption decisions. This is not solely related to financial literacy or cognitive awareness.…”

Inflation Expectations, Inflation Target Credibility and the COVID-19 Pandemic: New Evidence from Germany

“…One of the answer categories is that prices will "stay about the same" which should imply that the expected inflation rate is zero and, thus, clearly below the policy-intended level. Consequently, Andrade et al (2020) argue that inflation expectations are de-anchored when an important share of households expects prices to remain about the same. However, for many consumers the mapping between prices and inflation rates is not straightforward.…”