IDEAS home Printed from https://ideas.repec.org/p/euf/dispap/159.html
   My bibliography  Save this paper

Making Sense of Consumer Inflation Expectations: The Role of Uncertainty

Author

Listed:
  • Lovisa Reiche
  • Aidan Meyler

Abstract

Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand what they are and how they are formed. In this paper we introduce the (un)certainty channel as means to shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. These include the apparent overestimation of inflation by consumers as well as the negative correlation observed between the economic outlook and inflation expectations. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with socio-demographic characteristics and economic sentiment.

Suggested Citation

  • Lovisa Reiche & Aidan Meyler, 2022. "Making Sense of Consumer Inflation Expectations: The Role of Uncertainty," European Economy - Discussion Papers 159, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:dispap:159
    as

    Download full text from publisher

    File URL: https://economy-finance.ec.europa.eu/publications/making-sense-consumer-inflation-expectations-role-uncertainty_en
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Binder, Carola Conces, 2020. "Long-run inflation expectations in the shrinking upper tail," Economics Letters, Elsevier, vol. 186(C).
    2. Francesco D’Acunto & Ulrike Malmendier & Juan Ospina & Michael Weber, 2019. "Exposure to Daily Price Changes and Inflation Expectations," NBER Working Papers 26237, National Bureau of Economic Research, Inc.
    3. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    4. Ueno, Yuko & Namba, Ryoichi, 2014. "Heterogeneity and Biases in Inflation Expectations of Japanese Households," CIS Discussion paper series 614, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    5. Naohito Abe & Yuko Ueno, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," UTokyo Price Project Working Paper Series 064, University of Tokyo, Graduate School of Economics.
    6. Michael Ehrmann & Damjan Pfajfar & Emiliano Santoro, 2017. "Consumers' Attitudes and Their Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 225-259, February.
    7. Paolo del Giovane & Silvia Fabiani & Roberto Sabbatini, 2009. "What's Behind "Inflation Perceptions"? A Survey-Based Analysis of Italian Consumers," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 68(1), pages 25-52, April.
    8. Francesco D'Acunto & Daniel Hoang & Maritta Paloviita & Michael Weber, 2019. "Cognitive Abilities and Inflation Expectations," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 562-566, May.
    9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    10. Brachinger, Hans Wolfgang, 2008. "A new index of perceived inflation: Assumptions, method, and application to Germany," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 433-457, August.
    11. Abe, Naohito & Ueno, Yuko, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," RCESR Discussion Paper Series DP16-1, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lovisa Reiche, 2023. "That’s what she said: An Empirical Investigation on the Gender Gap in Inflation Expectations," Economics Series Working Papers 1025, University of Oxford, Department of Economics.
    2. Jonas Dovern & Alexander Glas & Geoff Kenny, 2024. "Testing for differences in survey‐based density expectations: A compositional data approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(6), pages 1104-1122, September.
    3. Stefano Neri & Guido Bulligan & Sara Cecchetti & Francesco Corsello & Andrea Papetti & Marianna Riggi & Concetta Rondinelli & Alex Tagliabracci, 2022. "On the anchoring of inflation expectations in the euro area," Questioni di Economia e Finanza (Occasional Papers) 712, Bank of Italy, Economic Research and International Relations Area.
    4. Michal Marencak, 2023. "State-dependent inflation expectations and consumption choices," Working and Discussion Papers WP 10/2023, Research Department, National Bank of Slovakia.
    5. Monge, Manuel & Lazcano, Ana & Infante, Juan, 2024. "Monetary policy and inflation rate in the behavior of consumer sentiment in the us. A fractional integration and cointegration analysis," Research in Economics, Elsevier, vol. 78(3).
    6. Raquel Ayestarán & Juan Infante & Juan José Tenorio & Luis Alberiko Gil-Alana, 2023. "Evidence of Inflation Using Harmonized Consumer Price Indices in Some Euro Countries: France, Germany, Italy, and Spain, along with the Euro Zone," Mathematics, MDPI, vol. 11(10), pages 1-12, May.
    7. Daria Minina & Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2024. "The effect of information on consumer inflation expectations," Working Papers 810, DNB.
    8. Ali Inayat, 2023. "Household Inflation Expectations Uncertainty: A Case for Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 28(1), pages 1-39, Jan-June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abildgren, Kim & Kuchler, Andreas, 2021. "Revisiting the inflation perception conundrum," Journal of Macroeconomics, Elsevier, vol. 67(C).
    2. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2023.
    3. repec:zbw:bofrdp:2021_010 is not listed on IDEAS
    4. Ewa Stanisławska & Maritta Paloviita, 2021. "Medium- vs. short-term consumer inflation expectations: evidence from a new euro area survey," NBP Working Papers 338, Narodowy Bank Polski.
    5. Stanisławska, Ewa & Paloviita, Maritta, 2021. "Responsiveness of consumers' medium-term inflation expectations : evidence from a new euro area survey," Research Discussion Papers 10/2021, Bank of Finland.
    6. Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2020. "The Hidden Heterogeneity of Inflation Expectations and its Implications," Finance and Economics Discussion Series 2020-054, Board of Governors of the Federal Reserve System (U.S.).
    7. Molnárová, Zuzana & Reiter, Michael, 2022. "Technology, demand, and productivity: What an industry model tells us about business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    8. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    9. Chan, Ying Tung & Zhao, Hong, 2023. "Optimal carbon tax rates in a dynamic stochastic general equilibrium model with a supply chain," Economic Modelling, Elsevier, vol. 119(C).
    10. Tobón Arias, Alexander, 2022. "La estructura lógica de la teoría del equilibrio general dinámico estocástico," Borradores Departamento de Economía 20477, Universidad de Antioquia, CIE.
    11. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    12. Kamber, Günes, 2010. "Inflation dynamics under habit formation in hours," Economics Letters, Elsevier, vol. 108(3), pages 269-272, September.
    13. Sergio Ocampo Díaz, 2012. "A Model of Rule-of-Thumb Consumers With Nominal Price and Wage Rigidities," Vniversitas Económica, Universidad Javeriana - Bogotá, vol. 0(0), pages 1-28, April.
    14. Coenen, Günter & Straub, Roland & Trabandt, Mathias, 2013. "Gauging the effects of fiscal stimulus packages in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 367-386.
    15. Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    16. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    17. Igor Vetlov & Tibor Hlédik & Magnus Jonsson & Henrik Kucsera & Massimiliano Pisani, 2011. "Potential Output in DSGE Models," Bank of Lithuania Working Paper Series 9, Bank of Lithuania.
    18. Marc P. Giannoni & Jean Boivin, 2005. "DSGE Models in a Data-Rich Environment," Computing in Economics and Finance 2005 431, Society for Computational Economics.
    19. Benjamín García & Sebastián Guarda & Markus Kirchner & Rodrigo Tranamil, 2019. "XMAS: An extended model for analysis and simulations," Working Papers Central Bank of Chile 833, Central Bank of Chile.
    20. Marco Del Negro & Frank Schorfheide, 2009. "Monetary Policy Analysis with Potentially Misspecified Models," American Economic Review, American Economic Association, vol. 99(4), pages 1415-1450, September.
    21. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber, 2022. "Does Policy Communication during COVID Work?," International Journal of Central Banking, International Journal of Central Banking, vol. 18(1), pages 3-39, March.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:euf:dispap:159. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ECFIN INFO (email available below). General contact details of provider: https://edirc.repec.org/data/dg2ecbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.