What Matters in Households' Inflation Expectations?

Abstract

We provide new survey evidence on how households' inflation expectations matter for their spending. A large share of households expects prices to remain stable instead of increasing. Such a belief is linked to individual experience with non-durable goods frequently purchased. Households expecting stable prices have a lower propensity to buy durable goods than those expecting positive inflation. In contrast, differences across households expecting positive inflation are associated with insignificant differences in durable consumption decisions. That behavioral distortion limits the impact of household inflation expectations on aggregate demand compared to the standard New Keynesian model.

Keywords: heterogeneous beliefs, Households' spending, Inflation expectation channel, Stabilization policies

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