Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/207189
Authors: 
D'Acunto, Francesco
Malmendier, Ulrike M.
Ospina, Juan
Weber, Michael
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper 7798
Abstract: 
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.
Subjects: 
beliefs formation
rational inattention
realized inflation
transmission of monetary policy
JEL: 
C90
D14
D84
E31
E52
E71
G11
Document Type: 
Working Paper

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