Beyond the Headline: How Personal Exposure to Inflation Shapes the Financial Choices of Households

Merike Kukk and Jan Toczynski

No wp2023-7, Bank of Estonia Working Papers from Bank of Estonia

Abstract: Using individual level panel data from a period of volatile inflation in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to respond to personal inflation beyond the headline rate. Households are exposed to different inflation due to different consumption baskets. For each percentage point of higher personal inflation exposure, they increase consumption by more than 1%, and also increase stock market investments. These responses are consistent with backwardlooking inflation expectations. They are financed with savings or borrowing, except when the household is liquidity-constrained or over-indebted. Extra demand when inflation is already high can make inflation persistent and dependent on its current distribution

Keywords: inflation heterogeneity; personal inflation exposure; consumption; borrowing; interactive fixed effects; intertemporal choices (search for similar items in EconPapers)
JEL-codes: D14 D15 E21 E31 (search for similar items in EconPapers)
Date: 2024-02-23, Revised 2024-02-23
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