Heterogeneity in Inflation Expectations and Personal Experience
76 Pages Posted: 8 May 2019 Last revised: 3 Aug 2019
Date Written: April 9, 2019
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: Suggested Citation