Do Political Attitudes Affect Consumers' Inflation Expectations

Abstract

What sources of information do consumers use in forming their inflation expectations? We show for the United States and Australia that consumers report significantly lower inflation expectations when the political party they support holds executive office. This is surprising because both the United States Federal Reserve and the Reserve Bank of Australia set monetary policy to achieve price stability free from political control. Our findings cannot be explained by previously documented sources of heterogeneity in consumer inflation expectations nor models of imperfect information and rational inattention. We argue that our findings are most consistent with Gennaioli and Shleifer's (2010) model of local thinking. We discuss implications for central bank communication.

Keywords: Inflation Expectations, Politics

JEL Classification: E31, P16