Consumer inflation expectations and local price changes: Learning from experience

This paper contributes to the empirical literature on the formation of inflation expectations among U.S. consumers by examining the extent to which individuals are influenced by local price fluctuations when reporting their short-term inflation expectations. Using individual-level survey data and a learning-from-experience framework, the analysis shows that expectations are shaped not only by national inflation but also by local inflation experiences. This result, confirmed using inflation data from both Census regions and metropolitan areas, is robust across alternative model specifications and estimation strategies. Interestingly, the influence of local inflation is strongest among first-time survey respondents and diminishes with survey tenure. This tenure effect indicates that expectation formation evolves as consumers become more familiar with the survey, potentially reflecting increased attention to broader economic information. Overall, we identify an additional driver of consumer inflation expectations related to local inflation developments and largely absent from the previous literature that should be controlled for in empirical models of expectation formation.