Who’s on FIRE? Household characteristics and the formation of inflation expectations

Lovisa Reiche, Gabriele Galati and Richhild Moessner

Working Papers from DNB

Abstract: We study how consumers form and revise inflation expectations using a unique, highly balanced monthly panel of Dutch households. We develop a Bayesian frame-work that nests Full-Information Rational Expectations (FIRE) alongside common forecasting heuristics and test it by recovering person-specific belief-updating rules from individual time-series regressions. Our novel individual-level design reveals sub-stantial heterogeneity in how households process information over time. On average, consumers systematically overreact to current inflation, echoing patterns found for pro-fessional forecasters. Only 2.5 percent, predominantly wealthier, more educated men, behave consistently with FIRE. Most consumers rely on simple heuristics, especially adaptive expectations. Our results show that heuristic learning, not FIRE, character-izes expectation formation for the vast majority of households. Crucially, heterogeneity in belief updating is both large and systematic.

Keywords: Household Inflation Expectations; FIRE; Heuristic Learning (search for similar items in EconPapers)
JEL-codes: E31 E37 E70 (search for similar items in EconPapers)
Date: 2025-12
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:852

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