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Inflation Expectations, Learning and Supermarket Prices

68 Pages Posted: 14 Oct 2014  

Alberto Cavallo

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Guillermo Cruces

Universidad Nacional de La Plata - Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS); IZA

Ricardo Perez-Truglia

University of California, Los Angeles (UCLA)

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Date Written: October 2014

Abstract

Information frictions play a central role in the formation of household inflation expectations, but there is no consensus about their origins. We address this question with novel evidence from survey experiments. We document two main findings. First, individuals in lower-inflation contexts have significantly weaker priors about the inflation rate. This finding suggests that rational inattention may be an important source of information frictions. Second, cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is made readily available, individuals still place a significant weight on less accurate sources of information, such as their memories of the price changes of the supermarket products they purchase. We discuss the implications of these findings for macroeconomic models and policy-making.

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Suggested Citation

Cavallo, Alberto and Cruces, Guillermo and Perez-Truglia, Ricardo, Inflation Expectations, Learning and Supermarket Prices (October 2014). NBER Working Paper No. w20576. Available at SSRN: https://ssrn.com/abstract=2510072

Alberto Cavallo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Guillermo Cruces

Universidad Nacional de La Plata - Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS) ( email )

Centro de Estudios Distributivos, Laborales y
Sociales, Calle 6 e/47 y 48
La Plata, Provincia de Buenos Aires 1900
Argentina

HOME PAGE: http://cedlas.econo.unlp.edu.ar

IZA

P.O. Box 7240
Bonn, D-53072
Germany

Ricardo Perez-Truglia

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty/global-economics-and-management/perez-truglia

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