Consumer Attitudes and the Epidemiology of Inflation Expectations

This paper studies the formation of consumers inflation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of inflation expectations like gender, income or education also other characteristics like the household s financial situation and its purchasing attitudes matter. Respondents with current or expected financial difficulties, with pessimistic attitudes about major purchases, or who expect income to go down in the future have considerably higher forecast errors, are further away from professional forecasts and have a stronger upward bias in their expectations than other households. However, their bias shrinks by more than the one of the average household in response to increasing media reporting about inflation