The Experience Formation Mechanism

Christian Conrad, Zeno Enders and Alexander Glas

No 775, Working Papers from University of Heidelberg, Department of Economics

Abstract: We show that inflation expectations of households causally depend on remembered rather than actually experienced inflation rates. Specifically, we asked German households for their remembered average and peak inflation rates and investigate how inflation experiences are formed and what they depend on. We establish five facts: (i) What matters for expectations is what households believe they have lived through, which cannot be proxied well by actual circumstances. (ii) On average, households overestimate current and lifetime inflation, although they are mostly confident in their estimates. (iii) Negative emotions associated with inflation raise the bias in perception and memory. (iv) High inflation rates are perceived and remembered more correctly. (v) Higher remembered inflation rates cause higher inflation expectations. We present a theoretical model that accounts for the empirical evidence.

Keywords: Household expectations; inflation expectations; inflation experience; Bundesbank household survey (search for similar items in EconPapers)
Date: 2026-11-04
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