How Do Households Respond to Expected Inflation? An Investigation of Transmission Mechanisms

Janet Hua Jiang (), Rupal Kamdar, Kelin Lu and Daniela Puzzello
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Janet Hua Jiang: Bank of Canada

CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: We disentangle the channels through which inflation expectations affect household spending. We conduct a survey featuring hypothetical scenarios that generate a controlled increase in inflation expectations. For 74% of households, current spending is unresponsive, typically due to fixed budget plans or irrelevance of inflation expectations. About 20% of households reduce spending, often citing wealth effects, nominal income rigidity, and inflation hedging. Only 6% increase spending due to intertemporal substitution or stockpiling. Respondents who expect other economic variables to deteriorate are more likely to reduce spending. Our findings suggest manipulating inflation expectations to boost consumer spending may not be an effective policy tool.

Keywords: survey; inflation expectations; consumption; mechanisms (search for similar items in EconPapers)
Pages: 21 pages
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2024-004.pdf (application/pdf)

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Working Paper: How Do Households Respond to Expected Inflation? An Investigation of Transmission Mechanisms (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2024004

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