Consumer Attitudes and the Epidemiology of Inflation Expectations

Abstract

This paper studies the formation of consumers’ infl‡ation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of infl‡ation expectations like gender, income or education also other characteristics like the household’s fi…nancial situation and its purchasing attitudes matter. Respondents with current or expected …financial difficulties, with pessimistic attitudes about major purchases, or who expect income to go down in the future have considerably higher forecast errors, are further away from professional forecasts and have a stronger updward bias in their expectations than other households. However, their bias shrinks by more than the one of the average household in response to increasing media reporting about in‡flation