Inflation misperceptions of consumers

Andreas Koundouros and Dieter Nautz

No 2026/18, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: Inflation misperceptions of consumers complicate the conduct and communication of monetary policy and can undermine the credibility of the central bank's inflation target. This paper empirically investigates the determinants of inflation misperceptions by extending a rational inattention model to incorporate distorted signals from salient prices. We estimate the model using rich micro-level panel data for the euro area drawn from the ECB Consumer Expectations Survey. We find that consumers misperceive inflation both because they are inattentive to inflation and because they overweight food price inflation relative to headline inflation. In contrast, distortions stemming from energy prices are not significant. Financially literate consumers exhibit lower inflation misperceptions and greater attention to inflation, while women have more pronounced inflation misperceptions and place larger weights on salient prices. Finally, we show that attention to inflation is higher and misperceptions are lower in response to inflationary than to disinflationary news.

Keywords: Inflation misperceptions; rational inattention; salient prices; inflationary news; financial literacy; gender differences; ECB Consumer Expectations Survey (search for similar items in EconPapers)
JEL-codes: E31 E58 E71 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-inv and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:343039

DOI: 10.17169/refubium-52929

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