DP14905 What Matters in Households' Inflation Expectations?

Author(s): Philippe Andrade, Erwan Gautier, Eric Mengus
Publication Date: June 2020
Date Revised: December 2021
Keyword(s): heterogeneous beliefs, Households' spending, Inflation expectation channel, Stabilization policies
JEL(s): D12, D84, E21, E31, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14905

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.