Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279809 
Year of Publication: 
2023
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 28/2023
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
I investigate how households and firms adjust their inflation expectations when experiencing an increase in their energy prices. I use monthly panel survey data in combination with a difference-in-difference approach to show that households increase their inflation expectations when they personally experience an increase in their electricity prices. This result is inconsistent with full-information rational expectations but can be rationalized by households extrapolating their personal experience. The effect is driven by low-income households, households who are uninformed about past inflation, and those not trusting the ECB. Due to households extrapolating, their inflation forecasts become less accurate and diverge more from professional forecasts. Contrary to households, firms do not extrapolate energy price increases to their inflation expectations. Thus, decision-makers in firms form their expectations similarly to high-income households.
Subjects: 
inflation expectations
households
firms
energy prices
extrapolation
JEL: 
D14
D22
D84
E31
Q41
ISBN: 
978-3-95729-962-8
Document Type: 
Working Paper

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