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Expectations of inflation: the biasing effect of thoughts about specific prices

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Listed:
  • Wändi Bruine de Bruin
  • Wilbert Van der Klaauw
  • Giorgio Topa

Abstract

National surveys follow consumers’ expectations of future inflation, because they may directly affect the economic choices they make, indirectly affect macroeconomic outcomes, and be considered in monetary policy. Yet relatively little is known about how individuals form the inflation expectations they report on consumer surveys. Medians of reported inflation expectations tend to track official estimates of realized inflation, but show large disagreement between respondents, due to some expecting seemingly extreme inflation. We present two studies to examine whether individuals who consider specific price changes when forming their inflation expectations report more extreme and disagreeing inflation expectations due to focusing on specific extreme price changes. In Study 1, participants who were instructed to recall any price changes or to recall the largest price changes both thought of various items for which price changes were perceived to have been extreme. Moreover, they reported more extreme year-ahead inflation expectations and showed more disagreement than did a third group that had been asked to recall the average change in price changes. Study 2 asked participants to report their year-ahead inflation expectations, without first prompting them to recall specific price changes. Half of participants nevertheless thought of specific prices when generating their inflation expectations. Those who thought of specific prices reported more extreme and more disagreeing inflation expectations, because they were biased toward various items associated with more extreme perceived price changes. Our findings provide new insights into expectation formation processes and have implications for the design of survey-based measures of inflation.

Suggested Citation

  • Wändi Bruine de Bruin & Wilbert Van der Klaauw & Giorgio Topa, 2011. "Expectations of inflation: the biasing effect of thoughts about specific prices," Staff Reports 489, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:489
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    References listed on IDEAS

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    1. David G. Blanchflower & Conall MacCoille, 2009. "The formation of inflation expectations: an empirical analysis for the UK," NBER Working Papers 15388, National Bureau of Economic Research, Inc.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Which Measure of Inflation Should a Central Bank Target?
      by noreply@blogger.com (Carola) in Quantitative Ease on 2015-09-06 17:04:00

    Citations

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    Cited by:

    1. Greene, Claire & Schuh, Scott & Stavins, Joanna, 2017. "The 2015 Survey of Consumer Payment Choice: summary results," Research Data Report 17-3, Federal Reserve Bank of Boston.
    2. repec:bla:jconsa:v:51:y:2017:i:1:p:200-210 is not listed on IDEAS
    3. Bruine de Bruin, Wändi & van der Klaauw, Wilbert & van Rooij, Maarten & Teppa, Federica & de Vos, Klaas, 2017. "Measuring expectations of inflation: Effects of survey mode, wording, and opportunities to revise," Journal of Economic Psychology, Elsevier, vol. 59(C), pages 45-58.
    4. repec:fip:fednep:00044 is not listed on IDEAS
    5. Bruine de Bruin, Wändi & van der Klaauw, Wilbert & Topa, Giorgio & Downs, Julie S. & Fischhoff, Baruch & Armantier, Olivier, 2012. "The effect of question wording on consumers’ reported inflation expectations," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 749-757.
    6. Alberto Cavallo & Guillermo Cruces & Ricardo Perez-Truglia, 2017. "Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 1-35, July.
    7. Armantier, Olivier & Topa, Giorgio & Van der Klaauw, Wilbert & Zafar, Basit, 2017. "An overview of the Survey of Consumer Expectations," Economic Policy Review, Federal Reserve Bank of New York, issue 23-2, pages 51-72.
    8. Ernest Gnan & Johannes Langthaler & Maria Teresa Valderrama, 2011. "Heterogeneity in Euro Area Consumers’ Inflation Expectations: Some Stylized Facts and Implications," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 43-66.
    9. Alberto Cavallo & Guillermo Cruces & Ricardo Perez-Truglia, 2016. "Learning from Potentially-Biased Statistics: Household Inflation Perceptions and Expectations in Argentina," NBER Working Papers 22103, National Bureau of Economic Research, Inc.
    10. repec:eee:ecolec:v:138:y:2017:i:c:p:56-63 is not listed on IDEAS
    11. Xu, Yingying & Chang, Hsu-Ling & Lobonţ, Oana-Ramona & Su, Chi-Wei, 2016. "Modeling heterogeneous inflation expectations: empirical evidence from demographic data?," Economic Modelling, Elsevier, vol. 57(C), pages 153-163.

    More about this item

    Keywords

    Consumer surveys ; Inflation (Finance) ; Prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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