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How Do Households Respond to Expected Inflation? An Investigation of Transmission Mechanisms

Author

Listed:
  • Janet Hua Jiang

    (Bank of Canada)

  • Rupal Kamdar

    (Indiana University)

  • Kelin Lu

    (Huazhong University of Science and Technology)

  • Daniela Puzzello

    (Indiana University)

Abstract

We disentangle the channels through which inflation expectations affect household spending. We conduct a survey featuring hypothetical scenarios that generate a controlled increase in inflation expectations. For 74% of households, current spending is unresponsive, typically due to fixed budget plans or irrelevance of inflation expectations. About 20% of households reduce spending, often citing wealth effects, nominal income rigidity, and inflation hedging. Only 6% increase spending due to intertemporal substitution or stockpiling. Respondents who expect other economic variables to deteriorate are more likely to reduce spending. Our findings suggest manipulating inflation expectations to boost consumer spending may not be an effective policy tool.

Suggested Citation

  • Janet Hua Jiang & Rupal Kamdar & Kelin Lu & Daniela Puzzello, 2024. "How Do Households Respond to Expected Inflation? An Investigation of Transmission Mechanisms," CAEPR Working Papers 2024-004 Classification-D, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2024004
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    File URL: https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2024-004.pdf
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    Keywords

    survey; inflation expectations; consumption; mechanisms;
    All these keywords.

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