Exposure to Grocery Prices and Inflation Expectations

Abstract

Consumers rely on the prices changes of goods in their grocery bundles when forming expectations about aggregate inflation. We use micro data that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. The weights consumers assign to price changes depend on the frequency of purchase, rather than expenditure share, and positive price changes loom larger than negative price changes. Prices of goods offered in the same store but not purchased do not affect inflation expectations, nor do other dimensions. Our results provide empirical guidance for models of expectations formation with heterogeneous consumers.

Keywords: Beliefs formation, heterogeneous agents, macroeconomics with micro data, household finance, behavioral finance

JEL Classification: C90, D14, D84, E31, E52, E71, G11