Do Households Anchor their Inflation Expectations? - Theory and Evidence from a Household Survey

Abstract

Abstract.The purpose of the present paper is to study how households form inflation expectations. Using a novel survey-base dataset of Italian households' opinions of inflation we investigate two separate, but related, types of behavior: 'inattentiveness' and 'anchoring'. The present analysis extends the existing literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. In addition, we extend the literature by considering both the short-and long-run dynamics as households update their inflation expectations while also accounting for their state-varying behavior. All these issues provide important insights into understanding actual inflation dynamics and the conduct of monetary policy. .

Consumer's inflation expectations in Brazil

“…Moreover, the inflation target is an anchor to consumers' expectation, while the media helps to reduce consumers' forecasting errors (Carroll 2003). The only result different from the previous literature was that professional forecasts have no significant effect on consumers' expectations (Easaw et al 2012). However, this result is in accordance with Campelo et al (2014).…”

“…This means that dynamic analyses are impossible since there is no guarantee that the same interviewee will be present throughout time (no respondent shows up throughout all the time period). This peculiarity forbids the use of "persistent information" expectations or epidemiological models and, even though we know that the groups heterogeneity might create bias in the aggregated series (Easaw et al 2012), it rests clear that no group in the sample has characteristics so different and striking that would allow it to bias the series as a whole.…”

“…This happens since the question in the survey does not make a direct link between the index and the answer asked. Consumers might form their expectations as the composition of two behaviors described in Easaw et al (2012Easaw et al ( , 2013: "inattentiveness" and "anchoring". This behavior occurs since acquiring information bears costs and, therefore, agents do it discretely over time.…”

“…We also attempt to partially replicate Easaw et al (2012) and Campelo et al (2014) in the Brazilian context by considering the media component as an important factor affecting consumers' behavior. To create the media variable, a crawler was used in FSP newspaper website, choosing phrases that were clearly related to inflation.…”

Anchoring of Consumers’ Inflation Expectations: Evidence from Microdata

“…This should be of equal importance to monetary policy makers, since through their wage-setting and consumption-saving decisions, this group has a great impact on an economy's price developments. To our knowledge, the only approach that studies the anchoring of consumers' expectations so far is the study by Easaw et al (2012). The authors extend the epidemiological model by Carroll (2003) to test whether households anchor their expectations to professionals' forecasts or on the official inflation target.…”