Inflation Expectations and Consumer Spending: The Role of Household Balance Sheets
30 Pages Posted: 5 Mar 2019 Last revised: 4 Mar 2020
Date Written: February 14, 2019
Research interest in the reaction of consumption to expected inflation has increased in recent years due to efforts by central banks to kick-start demand by steering inflation expectations. We contribute to this literature by analysing whether various components of households’ balance sheets determine how consumption reacts to expected inflation. Two channels in particular are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected real wealth, e.g. for households with nominal financial liabilities. By affecting the real interest rate, expected inflation can interact with wealth if only those households can adapt their consumption to current real interest rates that are not budget constrained or sufficiently liquid to shift funds between consumption and savings. We investigate these channels empirically using household-level information on balance sheets, durable consumption, and inflation expectations from the Dutch Central Bank’s Household Survey. We find that household net worth moderates the relation between expected inflation and durable spending decisions. This effect is particularly strong for households with fixed interest rate mortgages.
Keywords: Consumption, Wealth, Inflation, Expectations, Monetary Policy
JEL Classification: D12, D84, E21, E31, E52
Suggested Citation: Suggested Citation