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How Do Households Form Inflation and Wage Expectations?

Author

Listed:
  • Anthony Brassil

    (Reserve Bank of Australia)

  • Yahdullah Haidari

    (Reserve Bank of Australia)

  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Gulnara Nolan

    (Reserve Bank of Australia)

  • Callum Ryan

    (Reserve Bank of Australia)

Abstract

This paper explores the formation of households' wage and inflation expectations using a common dataset and framework, documenting a number of stylised facts. We find that households tend to form wage and inflation expectations somewhat differently. Households associate higher wages growth with good economic outcomes, but higher inflation with worse economic outcomes. Wages expectations also tend to be somewhat more forward looking, while inflation expectations are more backward looking, especially for lower income households, and place a disproportionate weight on past fuel prices. These findings paint a picture of households having a somewhat 'supply-side' view of inflation, where shocks that push up inflation also weaken the economy, but a more 'demand-side' view of wages, where shocks that push up wages also strengthen the economy, which may make communication of monetary policy and the outlook more challenging.

Suggested Citation

  • Anthony Brassil & Yahdullah Haidari & Jonathan Hambur & Gulnara Nolan & Callum Ryan, 2024. "How Do Households Form Inflation and Wage Expectations?," RBA Research Discussion Papers rdp2024-07, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2024-07
    DOI: 10.47688/rdp2024-07
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    More about this item

    Keywords

    inflation expectations; wage growth;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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