Household Belief Formation in Uncertain Times

We investigate the impact of heightened uncertainty in the post-pandemic economy on households’ inflation belief formation. Utilizing data from the Survey of Consumer Expectations, we document a marked decline in belief rigidity at the pandemic’s onset, indicating an increased receptiveness of households to new information. Through the lenses of a Bayesian belief updating model, we pinpoint two contributing causes: firstly, lockdown and stay-at-home policies significantly reduced the marginal cost of gathering information; secondly, increased volatility in economic fundamentals rendered existing information obsolete, thus prompting households to increase relative attention to new information. We document strong empirical support for the model’s implications in households’ expectations data. Our findings not only contribute to the understanding of belief formation mechanisms but also shed light on post-pandemic inflation dynamics, including possible alterations to the slope of the Philips Curve.