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Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation

Ina Hajdini, Edward Knotek, John Leer, Mathieu Pedemonte, Robert Rich and Raphael Schoenle

No 22-21R, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higher-paying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater output fluctuations. The survey results and model analysis provide a labor market channel for why people dislike inflation.

Keywords: inflation; wage-price spiral; expectations; randomized controlled trial (search for similar items in EconPapers)
JEL-codes: C83 E24 E31 E71 (search for similar items in EconPapers)
Pages: 69
Date: 2022-06-23, Revised 2023-03-27
New Economics Papers: this item is included in nep-dem, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Low Pass-Through from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation (2025) Downloads
Working Paper: Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation (2022) Downloads
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DOI: 10.26509/frbc-wp-202221r

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