Inflation Expectations of Households: Adaptive, Rational, or Sticky? Evidence from an Emerging Market Economy​​

Understanding the formation of inflation expectations is crucial for monetary policymaking, given that these expectations shape inflation dynamics. Using Bangko Sentral ng Pilipinas (BSP) Consumer Expectations Survey (CES) data, we test whether Filipino households’ inflation expectations can be characterized as adaptive, rational, or sticky. Empirical evidence indicates that households are partly adaptive and not fully rational. However, the survey data are more consistent with the sticky information model, which posits that agents are generally inattentive and infrequently update their forecasts. Results from an epidemiological model, validated using Bayesian posterior estimation, suggest that half of the households retain lagged, previous--quarter expectations; a third follow “rational†professional forecasts; and a fifth update adaptively based on the latest inflation data. We also estimate a state--dependent model, which shows that agents update forecasts more frequently during inflationary periods.