Household Inattention across the euro-area

We use inflation expectations survey data for households across the euro-area from 2004:1 to 2025:2 to construct two direct measures of inattention: one based on individual perception errors about current inflation, and a second based on individuals who do not know the current inflation rate. We find that the heterogeneity of the impact of aggregate noise across education levels is significantly more evident for perception errors as compared to the second measure. Importantly, perception-errors-based inattention declines with individuals’ early lifetime inflation experience and rises with recent experience. By contrast, the measure based on those who don’t know the current inflation rate does not respond systematically to households’ lifetime inflation experiences across these countries. We also find that inattention as measured by current inflation perception errors is lower in most of these euro-area economies after the arrival of extreme adverse shocks and for individuals with ‘greater skin in the game’, but not according to the second measure which does not exhibit as clear a pattern across countries. Relating these measures to forecast errors, we show that while higher perception errors relate to over-prediction of the future inflation rate and higher inflation forecast inaccuracy, the opposite is true for the measure based on those who don’t know the current inflation rate due to compositional effects unrelated to inattention. Unlike the latter, perception errors systematically produce results in line with economic theory.