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  3. 2025
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  5. Inflation: Expectations, Perceptions, and Beliefs
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Inflation: Expectations, Perceptions, and Beliefs

Paper Session

Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square
Hosted By: American Economic Association
  • Chair: Nicolas Magud, International Monetary Fund

Inflated Concerns: Exposure to Past Inflationary Episodes and Preferences for Price Stability

Nicolas Magud
,
International Monetary Fund
Samuel Pienknagura
,
International Monetary Fund

Abstract

Using individual-level survey data for both advanced economies and emerging markets spanning over 45 years for 42 countries, we show that cohorts who have had higher exposure to past inflationary episodes (levels, as well as to more persistent or to more volatile inflation), systematically express higher concerns over rising prices. The link between past high inflation exposure and expressed concerns over price stability is particularly strong when an individual’s exposure occurs in the latter part of her working-age (as in lifecycle theory). The impact of past exposure to high inflation on contemporaneous preferences over price stability increases when surveyed in the midst of high ongoing inflation and with macroeconomic instability (as measured by GDP growth volatility), but diminishes with the quality of institutions.

The Long-term Effects of Inflation on Inflation Expectations

Michael Weber
,
University of Chicago
Fabio Braggion
,
Tilburg University
Nic Schaub
,
WHU-Otto Beisheim School of Management
Felix von Meyerinck
,
University of Zurich

Abstract

We study the long-term effects of inflation surges on inflation expectations. German households living in areas with higher local inflation during the hyperinflation of the 1920s expect higher inflation today, after partialling out determinants of historical inflation and current inflation expectations. Our evidence points towards transmission of inflation experiences from parents to children and through collective memory. Differential historical inflation also modulates the updating of expectations to current inflation, the response to economic policies affecting inflation, and financial decisions. We obtain similar results for Polish households residing in formerly German areas. Overall, our findings are consistent with inflationary shocks having a long-lasting impact on attitudes towards inflation.

Consumer Inflation Expectations: Daily Dynamics

Carola Binder
,
Haverford College
Jeffrey Campbell
,
University of Notre Dame
Jane Ryngaert
,
University of Notre Dame

Abstract

We use high frequency identification methods to study the response of consumer inflation expectations to many different types of events. We use data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations. We identify the response of expectations to a large set of shocks, including FOMC announcements, macroeconomic data releases, and news related to the Covid-19 pandemic. The majority of FOMC meetings have no detectable effects on consumer inflation expectations, though certain especially salient announcements have short-lived effects. Good news about the pandemic tends to reduce inflation expectations.

The Roles of Beliefs and Frictions in the Consumption Decisions of Low-Income Workers

Ulrike Malmendier
,
University of California-Berkeley
Sasha Indarte
,
University of Pennsylvania
Raymond Kluender
,
Harvard Business School
Michael Stepner
,
University of Toronto

Abstract

This paper provides new evidence on how frictions and economic beliefs affect the consumption decisions of low-income consumers. We use a new survey linked to administrative consumer transactions and a semi-structural approach to quantify the effect of economic beliefs and frictions (i.e., economic constraints or behavioral preferences) on consumption. Our approach contrasts actual consumer choices with those implied by either rational expectations or a “friction-free” benchmark. We first document evidence of nonrational expectations accounting for consumption decisions: income forecast errors strongly predict consuming a higher fraction of current income. We then use a sufficient-statistics approach to measure the distortions to consumption induced by frictions. We find evidence of large distortions due to frictions, and significant heterogeneity in whether consumption is distorted upwards (under-saving) or downward (under-consuming). These findings imply that a single friction that distorts consumption in one direction, such as borrowing constraints or present bias, cannot explain the behavior of a significant portion of consumers. Instead, frictions like habit formation or combinations of other frictions can better match these patterns. Lastly, we show that the distortions due frictions are correlated with consumers' subjective expectations, suggesting that beliefs and frictions jointly interact to influence consumption.

Discussant(s)
Sebnem Kalemli-Ozcan
,
University of Maryland
Laura Alfaro
,
Harvard Business School
Mark Spiegel
,
Federal Reserve Bank of San Francisco
Martin Uribe
,
Columbia University
JEL Classifications
  • E7 - Macro-Based Behavioral Economics
  • E3 - Prices, Business Fluctuations, and Cycles