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The Hidden Heterogeneity of Inflation Expectations and its Implications

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Abstract

Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate. Furthermore, these differences in opinions affect German households differently depending on whether they are renters or homeowners.

Suggested Citation

  • Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2020. "The Hidden Heterogeneity of Inflation Expectations and its Implications," Finance and Economics Discussion Series 2020-054, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2020-54
    DOI: 10.17016/FEDS.2020.054
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    Cited by:

    1. Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2023. "The anchoring of long-term inflation expectations of consumers: insights from a new survey," Oxford Economic Papers, Oxford University Press, vol. 75(1), pages 96-116.
    2. Alistair Macaulay & Wenting Song, 2022. "Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media," Economics Series Working Papers 973, University of Oxford, Department of Economics.
    3. Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2021. "Anchoring of consumers’ long-term euro area inflation expectations during the pandemic," Working Papers 715, DNB.

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    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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