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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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Bibliographic Info

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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References

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Cited by:
  1. 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.
  2. Wilbert van der Klaauw & Wandi Bruine de Bruin & Giorgio Topa & Basit Zafar & Olivier Armantier, 2012. "Inflation Expectations and Behavior: Do Survey Respondents Act on their Beliefs?," 2012 Meeting Papers 121, Society for Economic Dynamics.
  3. N. Gregory Mankiw & Ricardo Reis, 2010. "Imperfect Information and Aggregate Supply," Discussion Papers 0910-11, Columbia University, Department of Economics.
  4. Canova, Fabio & Gambetti, Luca, 2009. "Do expectations matter? The Great Moderation revisited," CEPR Discussion Papers 7597, C.E.P.R. Discussion Papers.
  5. Carrera, César, 2012. "Estimating Information Rigidity using Firms’ Survey Data," Working Papers 2012-004, Banco Central de Reserva del Perú.

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