Inflation and Attention: Evidence from the Market Reaction to Macro Announcements
84 Pages Posted: 1 Aug 2023 Last revised: 21 Mar 2024
Date Written: July 31, 2023
Abstract
I present new evidence on the importance of investor attention for the link between
the macroeconomy and financial markets. Using intraday data, I show that the
Consumer Price Index (CPI) emerges as the most impactful data release during
the 2021–2023 inflation surge. Bond yields and market-implied inflation expectations,
as well as stocks and foreign asset prices respond significantly stronger
on impact to a surprise about CPI inflation, compared to the prior low-inflation
period. This increase in market sensitivity is unique among macro releases. The
joint response of asset prices to CPI releases points to a faster incorporation of
inflation news into inflation expectations, consistent with investors paying more
attention to the releases. I corroborate this interpretation with a range of evidence,
from documenting stark increases in trading volumes around CPI releases
to showing that news providers for professional investors intensified their coverage
of CPI releases during the inflation surge.
Keywords: Macroeconomic News Announcements, Investor Attention, Financial Markets, Rational Inattention, Inflation, High-frequency data, Event study
JEL Classification: E44, E71, G12, G14, G41
Suggested Citation: Suggested Citation