Salient Price Changes, Inflation Expectations, and Household Behavior

51 Pages Posted: 6 Jun 2019

See all articles by Francesco D'Acunto

Francesco D'Acunto

Boston College

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Juan Ospina

University of Chicago

Michael Weber

University of Chicago - Finance

Date Written: March 2019

Abstract

How do households form their inflation expectations? We show the price changes individual consumers observe while shopping are a key determinant of their expectation for overall inflation. We use individual non-durable consumption choices in the Nielsen Homescan Panel to construct household-level measures of perceived inflation. We find perceived price changes help explain inflation expectations across individuals and within individuals over time. The frequency of purchases not the expenditure share determines the importance of perceived price changes for inflation expectations. The effect is stronger for individuals that shop less frequently, and hence are more likely exposed to several and larger price changes in their typical shopping trip. The effect is also stronger for individuals whose uncertainty about inflation is higher and who self report to not rely on the media when forming expectations. Because individual inflation expectations shape economic decisions, central banks' focus on core inflation instead of the heterogeneous price changes in households' non-durable bundles might lead to systematic policy mistakes.

Keywords: Salience, Frequency Bias, Financial Literacy, Household Finance, Transmission of Monetary Policy

JEL Classification: C90, D14, D84, E31, E52, G11

Suggested Citation

D'Acunto, Francesco and Malmendier, Ulrike and Ospina, Juan and Weber, Michael, Salient Price Changes, Inflation Expectations, and Household Behavior (March 2019). Available at SSRN: https://ssrn.com/abstract=3373120 or http://dx.doi.org/10.2139/ssrn.3373120

Francesco D'Acunto (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Ulrike Malmendier

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)

HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

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

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918

Juan Ospina

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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