Working Paper: NBER ID: w26237
Authors: Francesco Dacunto; Ulrike Malmendier; Juan Ospina; Michael Weber
Abstract: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals' inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation---which excludes grocery prices---to design expectations-based policies might lead to systematic mistakes.
Keywords: Inflation Expectations; Price Changes; Consumer Behavior
JEL Codes: C83; D14; D84; D9; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household-specific grocery price changes (D19) | individual inflation expectations (E31) |
| frequency of grocery price changes observed (Q11) | inflation expectations (E31) |
| extreme price changes (E30) | reliance on price signals for inflation expectations (E31) |
| cognitive constraints (D91) | processing of price information (P22) |