Exposure to Daily Price Changes and Inflation Expectations

By Francesco D’acunto, Ulrike Malmendier, Juan J. Ospina, Michael Weber. Social Science Research Network, 2019

253 citations recorded by the source corpus.

We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals’ inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.

View Paper: https://www.semanticscholar.org/paper/d90f4abbb33d18e3465598dba31d547a8cc8f1e0

Citations in the corpus

• The Cost of the Covid-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending (2020, unknown): “The increased uncertainty at the household level as well the large drop in planned spending indicate the potential role for some form of liquidity insurance to curb the desire for precautionary spending and stimulate demand once local lockdowns are lifted (D’Acunto et al. 2020).”
• Coronavirus Fears and Macroeconomic Expectations (2020, unknown): “This may exacerbate pessimism and high inflation expectations, as D’Acunto et al. (2019, 2020) find that many consumers extrapolate from their grocery shopping experiences to form inflation expectations.”
• Labor Markets During the COVID-19 Crisis: A Preliminary View (2020, unknown): “In contemporaneous work, Bick and Blandin (2020) and Foote et al. (2020) provide real-time, high-frequency measures of the U.”