How to Limit the Spillover from an Inflation Surge to Inflation Expectations?

Abstract

Using a randomized control trial on German consumers we show that information about rising inflation increases inflation expectations. This initial increase in expectations can be mitigated by providing forecasts of inflation. Information about (future) inflation affects the whole term structure of inflation expectations, where the effects are smaller for longer-run expectations. This information also causes changes in consumption and savings decisions. In subsequent months− when consumers realize that inflation is much higher than the provided forecasts−they reverse the reliance on information about inflation forecasts and rely again more on their initial priors.

Keywords: short-run and long-run inflation expectations, inflation surge, randomized control trial, survey experiment, persistent or transitory inflation shock

JEL Classification: E310, E520, E580, D840