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Do Actions Speak Louder Than Words? Household Expectations of Inflation Based on Micro Consumption Data

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  • ATSUSHI INOUE
  • LUTZ KILIAN
  • FATMA BURCU KIRAZ

Abstract

Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear how accurately households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households' expectations of inflation from their consumption expenditures. We show that these expectations measures have predictive power for consumer price index (CPI) inflation. They are better predictors of CPI inflation than household survey responses and more highly correlated with professional inflation forecasts, except for highly educated consumers, consistent with the view that more educated consumers are better able to articulate their expectations. We also document that households' inflation expectations respond to inflation news, as measured by the unpredictable component of inflation predictions in the Survey of Professional Forecasters. The response to inflation news tends to increase with households' level of education, consistent with the existence of constraints on household's ability to process this information. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 7 (October)
Pages: 1331-1363

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:7:p:1331-1363

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Citations

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Cited by:
  1. Canova, Fabio & Gambetti, Luca, 2009. "Do expectations matter? The Great Moderation revisited," CEPR Discussion Papers 7597, C.E.P.R. Discussion Papers.
  2. Carrera, César, 2012. "Estimating Information Rigidity using Firms’ Survey Data," Working Papers 2012-004, Banco Central de Reserva del Perú.
  3. Kilian, Lutz, 2011. "Structural Vector Autoregressions," CEPR Discussion Papers 8515, C.E.P.R. Discussion Papers.
  4. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2011. "Inflation expectations and behavior: Do survey respondents act on their beliefs?," Staff Reports 509, Federal Reserve Bank of New York.
  5. Menz, Jan-Oliver & Poppitz, Philipp, 2013. "Households' disagreement on inflation expectations and socioeconomic media exposure in Germany," Discussion Papers 27/2013, Deutsche Bundesbank, Research Centre.
  6. N. Gregory Mankiw & Ricardo Reis, 2010. "Imperfect Information and Aggregate Supply," Discussion Papers 0910-11, Columbia University, Department of Economics.
  7. Michael J. Lamla & Sarah M. Lein, 2010. "The Euro Cash Changeover, Inflation Perceptions and the Media," KOF Working papers 10-254, KOF Swiss Economic Institute, ETH Zurich.

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