Spend Today or Spend Tomorrow? The Role of Inflation Expectations in Consumer Behaviour

Abstract

This paper investigates whether Italian households’ actual expenditure and willingness to buy durables (cars) are related to their inflation expectations. In a high-inflation regime, as in the early 1990s, consumers with higher inflation expectations tend to have higher current than future expenditure, suggesting that an inter-temporal substitution mechanism is at work. Conversely, in a low-inflation environment, such as the one after the global financial crisis, higher expected inflation lowers households’ purchasing power and, thereby, spending (income effect). We also find that the composition of household balance sheets matters for explaining how inflation expectations shape spending behaviour.

Keywords: readiness to spend, intertemporal substitution effect, income effect, financial constraints

JEL Classification: D12, D84, E21, E31, E52