Expectations Anchored in the Past: Inflationary Memory and Belief Formation in Mexico

Latin America's history has been marked by episodes of high inflation and economic crises, leaving lasting imprints on the region's economies. Mexico represents a compelling case, given its recurrent periods of inflationary volatility. This paper examines whether such experiences continue to shape expectations today. Specifically, it investigates whether past inflation episodes in Mexico affect individuals' current views about future price dynamics, using an Inflation Exposure Index (IEI) that weights years according to the intensity of inflation each person has lived through. To address this question, the study relies on microdata from the Encuesta Nacional sobre Confianza del Consumidor (ENCO), conducted by the Instituto Nacional de Estadistica y Geografia (INEGI). Respondents are asked how they expect prices to behave over the next 12 months compared with the previous 12 months, with answers ranging from 1 ("decrease a lot") to 6 ("increase a lot"). Employing an ordered probit model, the results show that individuals with greater exposure to high-inflation periods are more likely to predict that prices will "increase a lot." Moreover, the analysis uncovers heterogeneity: women, older respondents, and those with lower educational attainment tend to hold more pessimistic views about inflation. The findings align with existing literature on the persistence of inflationary memories and highlight their policy relevance. Understanding how demographic and experiential factors shape expectation formation is crucial for central banks, as these dynamics complicate the management of credibility and the transmission of monetary policy, while underscoring the need for communication strategies tailored to diverse groups of economic agents.