Working Paper: CEPR ID: DP5790
Authors: Atsushi Inoue; Lutz Kilian; Fatma Burcu Kiraz
Abstract: Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households' implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households' implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers' expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.
Keywords: Consumer Expenditure; Survey; Euler Equation; Inflation Expectations; Michigan Survey of Consumers; Survey of Professional Forecasters
JEL Codes: D12; D84; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implicit measure of household inflation expectations derived from consumption data (D12) | CPI inflation (E31) |
| past CPI inflation (E31) | future household inflation expectations (D19) |
| inflation news (E31) | household inflation expectations (D19) |
| education (I29) | responsiveness of expectations to inflation news (D84) |