Anatomy of Consumption Risk

We use panel data from the 2023-24 Italian Survey of Consumer Expectations which provides information on the expected consumption growth, income growth, energy prices, health expenditure distributions, and expectations related to aggregate variables (GDP growth, inflation, unemployment, house prices, interest rates). We quantify the impact of underlying risks on the expected consumption risk estimating the pass-through coefficients of the individual and aggregate risks. Idiosyncratic risks account for 75% of the predicted consumption risk: health risk has the largest impact, followed by income risk. We find that aggregate risks also matter, especially the expected GDP variability and increase in house prices but account for less than 20% of the consumption risk. Thus, most of the uncertainty harming consumer welfare is due not to business cycle but to idiosyncratic shocks. The income risk pass-through is larger for young working individuals with low levels of cash-in-hand and reflects their greater exposure and fewer insurance opportunities. In the final step of our analysis we use subjective expectations data and an instrumental variables approach and show that expected consumption growth is related positively to expected consumption risk, as predicted by precautionary savings models. Our estimates imply a coefficient of relative prudence in the plausible range of 2-3.