Do Actions Speak Louder than Words? Household Expectations of Inflation Based on Micro Consumption Data

43 Pages Posted: 9 Oct 2006

See all articles by Atsushi Inoue

Atsushi Inoue

Southern Methodist University

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Fatma Burcu Kiraz

North Carolina State University - Department of Agricultural & Resource Economics

Date Written: August 2006

Abstract

Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households' implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households' implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers' expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.

Keywords: Inflation expectations, consumer expenditure survey, Michigan survey of consumers, survey of professional forecasters, Euler equation

JEL Classification: D12, D84, E31

Suggested Citation

Inoue, Atsushi and Kilian, Lutz and Kiraz, Fatma Burcu, Do Actions Speak Louder than Words? Household Expectations of Inflation Based on Micro Consumption Data (August 2006). CEPR Discussion Paper No. 5790. Available at SSRN: https://ssrn.com/abstract=936218

Atsushi Inoue

Southern Methodist University ( email )

Dallas, TX 75275
United States

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fatma Burcu Kiraz

North Carolina State University - Department of Agricultural & Resource Economics ( email )

Box 8109
3332 Nelson Hall
Raleigh, NC 27695-8109
United States

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