Exposure to Grocery Prices and Inflation Expectations

Abstract

We show that, when forming expectations about aggregate inflation, consumers rely on the prices of goods in their personal grocery bundles. Our analysis uses novel representative micro data that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. The data also reveal that the weights consumers assign to price changes depend on the frequency of purchase, rather than expenditure share, and that positive price changes loom larger than similar-sized negative price changes. Prices of goods offered in the same store but not purchased (any more) do not affect inflation expectations, nor do other dimensions such as the volatility of price changes. Our results provide empirical guidance for models of expectations formation with heterogeneous consumers.

Keywords: behavioral finance, Beliefs formation, Heterogeneous Agents, household finance, Inflation expectations, macroeconomics with micro data

JEL Classification: C90, D14, D84, E31, E52, G11