Consumer inflation expectations and regional price changes

Employing micro and aggregate observations on inflation expectations, we analyze the extent to which US consumers are affected by regional price swings when reporting their predictions of inflation. We begin with the aggregate data analysis based on a generalized sticky information model. The results indicate that regional differences in inflation rates do exert a statistically significant impact on disagreement in inflation expectations among consumers. However, the quantitative importance of this effect is small. The second part of the analysis employs micro survey observations to assess the importance of regional prices in the formation of inflation expectations. This is done, firstly, by considering a framework in which information is sticky and, secondly, in a context where consumer’s experience of inflation matters when forming expectations. We find that regional rather than national inflation rates affect consumers’ views on inflation in short- and medium-term horizon.