Inflation perception and the formation of inflation expectations

Torsten Schmidt, Henrik Müller, Jonas Rieger, Tobias Schmidt and Carsten Jentsch

No 1025, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: In this paper, we present a new indicator to measure the media coverage of inflation. Our Inflation Perception Indicator (IPI) for Germany is based on a corpus of three million articles published by broadsheet newspapers between January 2001 and November 2022. It is designed to detect thematic trends, thereby providing new insights into the dynamics of inflation perception over time. Methodically, the IPI makes use of RollingLDA, a dynamic topic modeling approach refining the rather static original LDA to allow for changes in the model's structure over time. We then use time series for the overall inflation perception indicator as well as for specific topics to analyze time-varying correlations with time series for inflation expectations of firms and households. Our results reveal that the link between reporting about inflation and changes in inflation expectations is time-dependent. During periods of intensive newspaper coverage of inflation developments, a correlation with inflation expectations emerges that does not exist at other times. Such correlations are evident after the introduction of the euro, during the financial crisis and during the recent energy price shock.

Keywords: Inflation; perception; expectations; media; attention cycle (search for similar items in EconPapers)
JEL-codes: C22 C82 D84 E31 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:1025

DOI: 10.4419/96973191

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