Heterogeneity in Inflation Expectations and Personal Experience

76 Pages Posted: 8 May 2019 Last revised: 3 Aug 2019

See all articles by Cristina Angelico

Cristina Angelico

Bocconi University; Bank of Italy

Federica Di Giacomo

University of Rome Tor Vergata

Date Written: April 9, 2019

Abstract

We suggest a new channel to explain the dispersion in inflation expectations across income groups, using personal shopping experiences. We propose a model of intuitive thinking in which the agents use private and public signals to predict future prices, we use the inflation rates computed at the household level as a proxy for the private signals and the US CPI as a proxy for the public one. Exploiting data on personal spending from the Kilts-Nielsen Consumer Panel and data on households' beliefs from the Michigan Survey of Consumers, we empirically investigate the relationship between individual inflation rates and inflation expectations. We find that agents look at both personal experience and US aggregate inflation when forming their expectations. Further, agents are particularly affected by salient goods. We conclude that the heterogeneity in inflation expectations across income classes derives from the heterogeneity in the private signals and in the way agents process the multiple pieces of information.

Keywords: Heterogeneity, Individual inflation, Inflation expectations

JEL Classification: E31, E71, D12, D84

Suggested Citation

Angelico, Cristina and Di Giacomo, Federica, Heterogeneity in Inflation Expectations and Personal Experience (April 9, 2019). Available at SSRN: https://ssrn.com/abstract=3369121 or http://dx.doi.org/10.2139/ssrn.3369121

Cristina Angelico

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Federica Di Giacomo (Contact Author)

University of Rome Tor Vergata ( email )

Via Cracovia 1
Rome, 00133
Italy

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