Inflation and Attention: Evidence from the Market Reaction to Macro Announcements

84 Pages Posted: 1 Aug 2023 Last revised: 21 Mar 2024

See all articles by Niklas Kroner

Niklas Kroner

Board of Governors of the Federal Reserve System

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

Kroner, T. Niklas, Inflation and Attention: Evidence from the Market Reaction to Macro Announcements (July 31, 2023). Available at SSRN: https://ssrn.com/abstract=4527424 or http://dx.doi.org/10.2139/ssrn.4527424

T. Niklas Kroner (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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