Working Paper: CEPR ID: DP14930
Authors: Francesco Dacunto; Ulrike M. Malmendier; Juan Ospina; Michael Weber
Abstract: We show that, when forming expectations about aggregate inflation, consumers rely on the prices of goods in their personal grocery bundles. Our analysis uses novel representative micro data that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. The data also reveal that the weights consumers assign to price changes depend on the frequency of purchase, rather than expenditure share, and that positive price changes loom larger than similar-sized negative price changes. Prices of goods offered in the same store but not purchased (any more) do not affect inflation expectations, nor do other dimensions such as the volatility of price changes. Our results provide empirical guidance for models of expectations formation with heterogeneous consumers.
Keywords: beliefs formation; inflation expectations; heterogeneous agents; macroeconomics with micro data; household finance; behavioral finance
JEL Codes: C90; D14; D84; E31; E52; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| grocery price changes (Q11) | inflation expectations (E31) |
| frequency of purchase (D12) | inflation expectations (E31) |
| positive price changes (E30) | inflation expectations (E31) |
| household CPI (D19) | expected inflation (E31) |
| prices of goods not purchased (P22) | inflation expectations (E31) |
| price volatility (G13) | inflation expectations (E31) |