Indirect Consumer Inflation Expectations: Theory and Evidence

Ina Hajdini, Edward Knotek, John Leer, Mathieu Pedemonte, Robert Rich and Raphael Schoenle

No 22-35, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations perform well along several empirical dimensions. Exploiting the geographically detailed, high-frequency variation in the data, we then show that individual experiences matter for inflation expectations, in a nuanced way. For example, age and gender have different effects internationally, while individual inflation and local experiences are generally highly relevant. In an application to gasoline price changes, we identify large effects of experienced gasoline price changes on inflation expectations, characterized by both overreaction and persistence.

Keywords: Inflation; Expectations; Surveys; Consumers; Heterogeneous Beliefs (search for similar items in EconPapers)
JEL-codes: D84 E31 E37 E71 (search for similar items in EconPapers)
Pages: 37
Date: 2022-11-22
New Economics Papers: this item is included in nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-202235 Full Text (text/html)

Related works:
Journal Article: Indirect consumer inflation expectations: Theory and evidence (2024)
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:fedcwq:95164

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-202235

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().