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Heterogeneous inflation expectations and forecast errors across the income distribution: The role of memory

Author

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  • Angelico, Cristina
  • Di Giacomo, Federica

Abstract

Poor households report significantly higher inflation expectations than wealthy households. Using data on shopping experiences, we show that each income group’s inflation expectations depend on both the group’s grocery experiences and past aggregate inflation, but personal experiences are weighted excessively. To explain these findings, we develop a model in which consumers form expectations by combining two sources of information stored in memory: prices observed while shopping and public news about aggregate inflation. When predicting inflation, they selectively retrieve information from memory, as not all information is equally accessible: prices encountered frequently or perceived as particularly high (salient) are easier to recall. We test the model empirically and show that, consistent with its predictions, expectations overweight salient memories, leading to predictable forecast errors. Individuals also anchor their expectations on news about aggregate inflation, but this does not improve the accuracy of the forecasts.

Suggested Citation

  • Angelico, Cristina & Di Giacomo, Federica, 2026. "Heterogeneous inflation expectations and forecast errors across the income distribution: The role of memory," Journal of Economic Behavior & Organization, Elsevier, vol. 246(C).
    • Handle: RePEc:eee:jeborg:v:246:y:2026:i:c:s0167268126001381
    DOI: 10.1016/j.jebo.2026.107552
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    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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