Household inflation expectations and consumer spending: evidence from panel data

Mary Burke and Ali Ozdagli

No 13-25, Working Papers from Federal Reserve Bank of Boston

Abstract: With nominal interest rates at the zero lower bound, an important question for monetary policy is whether, as predicted in prior theoretical work, an increase in inflation expectations would boost current consumer spending. Using survey panel data for the period from April 2009 to November 2012, we examine the relationship between a household's inflation expectations and its current spending, taking into account other factors such as the household's wage growth expectations, the uncertainty surrounding its inflation expectations, macroeconomic conditions, and unobserved heterogeneity at the household level. We examine spending behavior for large consumer durables as well as for nondurable goods. No evidence is found that consumers increase their spending on large home appliances and electronics in response to an increase in their inflation expectations. In most models, the estimated effects are small, negative, and statistically insignificant. However, consumers do appear more likely to purchase a car as their short-run inflation expectations rise. Additionally, in some models, spending on nondurable goods increases with short-run expected inflation. These estimated effects on nondurables spending are modest, not highly robust, and appear to be driven by the behavior of homeowners who did not have a mortgage. These findings are surprising because theory predicts that consumption of durable goods should be more sensitive to real interest rates than consumption of nondurable goods. In addition, consumers in our sample, on average, did not expect their nominal income growth to match inflation, and therefore an increase in expected inflation would create a negative income effect that discourages spending in both the present and the future. The findings suggest that, as a policy measure, raising inflation expectations may not be effective in boosting present consumption.

JEL-codes: D12 D84 D91 E52 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2013-12-18
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
http://www.bostonfed.org/economic/wp/wp2013/wp1325.pdf Full text (application/pdf)

Related works:
Journal Article: Household Inflation Expectations and Consumer Spending: Evidence from Panel Data (2023)
Working Paper: Household Inflation Expectations and Consumer Spending: Evidence from Panel Data (2021)
Working Paper: Household Inflation Expectations and Consumer Spending: Evidence from Panel Data (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:13-25

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().