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

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  • Inoue, Atsushi
  • Kilian, Lutz
  • Kiraz, Fatma Burcu

Abstract

Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households' implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households' implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers' expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5790.

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Date of creation: Aug 2006
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Handle: RePEc:cpr:ceprdp:5790

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Keywords: consumer expenditure survey; Euler equation; inflation expectations; Michigan survey of consumers; survey of professional forecasters;

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Cited by:
  1. Fabio Canova & Luca Gambetti, 2010. "Do Expectations Matter? The Great Moderation Revisited," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 183-205, July.
  2. N. Gregory Mankiw & Ricardo Reis, 2010. "Imperfect Information and Aggregate Supply," NBER Working Papers 15773, National Bureau of Economic Research, Inc.
  3. Carrera Cesar, 2012. "Estimating Information Rigidity Using Firms' Survey Data," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-34, June.
  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. 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.
  7. Kilian, Lutz, 2011. "Structural Vector Autoregressions," CEPR Discussion Papers 8515, C.E.P.R. Discussion Papers.

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