Carbon pricing and heterogeneity in household inflation expectations: evidence from the Euro Area

Given growing concerns among policymakers about the inflationary consequences of climate policies, I examine how households in the Euro Area adjust their inflation expectations in response to carbon policy shocks. The main finding is that a shock increasing energy inflation by one percentage point leads households to raise their inflation expectations by up to 0.1 percentage points. This aggregate response masks important cross-country heterogeneity, where the expectations response in countries with a larger share of energy-intensive goods in household consumption and a stronger deterioration of consumer sentiment is more pronounced. The timing and magnitude of these responses closely mirror those following an oil supply news shock, suggesting a common household expectations response to energy price shocks regardless of their source. Decomposing the response reveals that households adjust their expectations primarily through the energy price pass-through channel rather than in direct response to the shock itself.