Heterogeneity in the Formation of Inflation Expectations: Evidence from Micro Data

Using micro-level data from the Canadian Survey of Consumer Expectations and a heterogeneous expectations model, we characterize the heterogeneity in inflation expectation formation among households across inflation regimes and demographic groups. We show that the recent inflation surge not only increased the level and dispersion of inflation expectations, but also altered expectation formation itself, with marked demographic heterogeneity and more widespread trend-chasing behavior than before the pandemic. Furthermore, only when inflation is high are these trend- chasing behaviors associated with higher expectations for a wide range of economic variables in the short and the long run, concerns about monetary policy, and restrained household spending along weak real wage expectations. Our micro-based insights show how an inflation surge broadly ‘scars’ forecasting behaviors, which poses a challenge for completing the ‘last mile’ of disinflation.