Exposure to Daily Price Changes and Inflation Expectations

59 Pages Posted: 14 Oct 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

Multiple version iconThere are 3 versions of this paper

Date Written: 2019

Abstract

We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals' inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.

Keywords: beliefs formation, rational inattention, realized inflation, transmission of monetary policy

JEL Classification: C900, D140, D840, E310, E520, E710, G110

Suggested Citation

D'Acunto, Francesco and Malmendier, Ulrike and Ospina, Juan and Weber, Michael, Exposure to Daily Price Changes and Inflation Expectations (2019). CESifo Working Paper No. 7798. Available at SSRN: https://ssrn.com/abstract=3468030

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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