Googling “Inflation”: What does Internet Search Behaviour Reveal about Household (In)attention to Inflation and Monetary Policy?

This paper shows that internet search intensity for the term “inflation” provides a meaningful direct measure of attention to inflation by households across the euro area. In support of the theory of rational inattention, it finds that inflation attention is contingent on the level of inflation and increases in it in a non-linear manner, pointing to different inflation attention-regimes. As inflation increases, economic agents abandon their state of inattention at an accelerating rate, which may have lasting implications on inflation expectations and the way they are formed. Attention to inflation in some euro area countries is also found to be triggered by other factors, notably monetary policy decisions or a deterioration in households’ economic situation. This suggests that households do establish a link between inflation and monetary policy decisions, and think about inflation when economic sentiment drops. However, there is strong heterogeneity across the euro area, both in terms of inflation attention levels and sensitivity. These findings have implications for public communication in high inflation attention-regimes and for the modelling of inflation expectations when there are information frictions.