DP5790 Do Actions Speak Louder than Words? Household Expectations of Inflation Based on Micro Consumption Data

Author(s): Atsushi Inoue, Lutz Kilian, Fatma Burcu Kiraz
Publication Date: August 2006
Keyword(s): consumer expenditure survey, Euler equation, inflation expectations, Michigan survey of consumers, survey of professional forecasters
JEL(s): D12, D84, E31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5790

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.